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Cornell - AEM 2400 - Class Notes - Week 1

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Cornell - AEM 2400 - Class Notes - Week 1

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background image Prelim 2 Reading notes:  CH.5:  Expected value: the value of an uncertain event is weighted against the 
chances that the event will occur
-  the sum of the expected payoffs In decisions models, the expected value is calculated for each chance node 
and compared to a competing chance node
Expected Payof: the average weighted payoff for a specific event pathway 
of a particular strategy
- Calculated by: (Probability x Payoff) = Expected Payoff {RULES OF PROBABLITY}: - Events in a model branch must be mutually exclusive and  independent.  o Means that only one can occur, one cannot occur at the same  time as another.  - When events are mutually exclusive, their probabilities must add up to  1 o Complement Rule - The probability that two events will occur is the product of the two  probabilities  o P(A and B) = P(A) x P(B)  [Basic Components of a decisions analysis model] - 1. Decision node – usually a square
- 2. Branches, made up of lines 
- 3. Chance nodes – circles
- 4. Terminal nodes – triangles
Event Pathway: the weighted mean value of all events added up together Decision Analysis Model: an alternative to event pathway - calculates costs and QALY’s associated with the event in the event  pathway at the same time.  - Will allow us to determine if a treatment or intervention is cost- effective, but also important to ask for “who” is it cost effective 
(perspectives)
Decision Tree Model: essentially an event pathway flipped on the side - Allows us to see two competing alternatives on the same tree
background image - Decision Node: represents the point in the decision tree where the  provider or policy maker chooses one or the other.  Represented by a 
square. 
- Chance Node: followed by two or more possible outcomes.  - Terminal Nodes: indicated the very end of the model.  CALCULATING THE PROBABILITY OF EACH STRATEGY: to calculate the probability for each terminal node, we need to apply the 
multiplication ruled for independent events.
- Example:  Probability of getting vaccinated, becoming ill, and recovers  o P (Becomes Ill) x P(Recovers) = .027  - Each terminal node is calculated using this rule  Expected Probability ** Make sure that the sum of the probabilities of the terminal nodes 
sup up to 1 for each treatment strategy
CALCULATING THE COST OF EACH STRATEGY - We have to calculate the total cost for each terminal node in the  decision tree - Total cost for an event pathway is the cumulative cost  associated with all the branches of the pathway that precedes 
the terminal node
Expected Cost: when we multiply each cost by each probability in a 
pathway and then add those costs together. 
- Multiply the probability with the total cost for each terminal node.  Example: expected cost of : vaccination, becoming ill, going to doctor and 
being hospitalized: 
[ .03 x .10 x.001 x $5,132 (total cost)] = $.02  expected cost  So: Multiply together all probabilities of that pathway, and then 
multiply that by the total cost of that pathway. The result is the 
expected cost.  
After calculating the expected cost for each terminal node, you can sum 
them up for each treatment strategy and get the total expected cost for 
that intervention. 
ROLLBACK METHOD (THINKING INSIDE THE TREE)

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School: Cornell University
Department: AEM
Course: Marketing
Professor: Debra Perosio
Term: Fall 2016
Tags: practice, uploading, and notes
Name: Practice Upload Week 1
Description: A practice upload of notes.
Uploaded: 07/15/2017
6 Pages 65 Views 52 Unlocks
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