Example 6 A group of friends are planning a recreational outing and have constru

Question

Example 6 A group of friends are planning a recreational outing and have constructed the following payoff table to help them decide which activity to engage in. Assume that the payoffs represent their level of enjoyment for each activity under the various weather conditions. Cold S1 Weather Warm Rainy S2 S3 Bike: A1 Hike: A2 Fish: A3 10 14 7 8 15 8 2 9 1. If the probabilities of cold weather (51), warm weather (S2), and rainy weather (S3) are 0.2, 0.4, and 0.4, respectively, then what decision should be made using the expected value criterion? Given the above probabilities, then what is the EVPI for this situation? 2.

Explanation / Answer

1) As per the expected value criterion, Hike should be chosen with the EMV=9.6

2) EVPI=EV|PI-EMV

EV|PI=14*0.2+15*0.4+9*0.4=12.4

  EVPI=12.4-9.6=2.8

Cold Warm Rainy EV Bike 10 8 6 7.6 Hike 14 15 2 9.6 Fish 7 8 9 8.2 Probability 0.2 0.4 0.4

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