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Info3010 Week 9 notes

by: Rebecca Evans

Info3010 Week 9 notes Info3010

Marketplace > Tulane University > Business > Info3010 > Info3010 Week 9 notes
Rebecca Evans
GPA 4.0

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About this Document

Bayesian Affair problem and decision trees.
Business Modeling
Srinivas Krishnamoorthy
Class Notes
25 ?




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This 3 page Class Notes was uploaded by Rebecca Evans on Monday March 14, 2016. The Class Notes belongs to Info3010 at Tulane University taught by Srinivas Krishnamoorthy in Spring 2016. Since its upload, it has received 23 views. For similar materials see Business Modeling in Business at Tulane University.


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Date Created: 03/14/16
Monday March 7 th The Bayesian Affair You have a talent for writing romantic thriller novels. Your latest price of work - titled The Bayesian Affair - promises to be successful. You have the option to either publish the novel yourself or through a publisher. The publisher is offering you $20,000 for signing the contract. If the novel is successful, it will sell 200,000 copies. If it isn’t, it will sell only 10,000 copies. The publisher pays $1 royalty per copy. If you publish the novel yourself, you will incur an initial cost of $120,000 for printing and marketing, but each copy will net you $2. At present you believe that there is a 70% chance that the novel will be successful. Suppose you can contact a literary agent to give his expert opinion on the chances of the novel’s success. The agent will charge you $5,000. The agent’s track record indicates that when a novel is actually successful, the agent will predict the wrong outcome 20% of the time. When the novel is actually not successful, the agent will give the correct prediction 85% of the time. What should be your decision(s)? Compute the EVSI and EVPI for this decision situation. Solve  Base rate of success= 70% (unusually high success rate maybe successful in past) Agents says Positive Negative Successful (.8)(700) (.2)(700) 700 =560 =140 Actual Not (300-255) (.85)(300) 300 Successful =45 =255 605 395 1000  P(Agent says positive)= 605/1000 = 0.605 Conditional Probabilities  P(Actually successful if agent says success)= 560/605 = 0.93 o Condition given: agent says success o Outcome: actually successful o Given condition, what is the probability of this outcome o Actually successful when agent say positive/total agent says positive  P(actually unsuccessful if agent says negative)= 255/395= 0.65 Wednesday March 9 th The Bayesian Affair Value of Information Sample information (from an imperfect test)  Get values from rolled back decision tree o Don’t use agent= EV without info=$166k o Use agent=EV with paid sample info=186.4k  EV with free sample info= $186.4k + $5k= $191.4k  EVSI (Expected value of sample info)= EV with free sample info- EV without info= o $191.4k - $166k= $25.4k  Conclusion: makes sense to pay the agent for information Perfect Information  EV with paid perfect info o EV(z)= (0.7)($275k) + (0.30)($25k)= $200k  EV with free perfect info= $200k + $5k= $205k  EVPI (expected value of perfect information)= $205k - $166k= $39k o EVPI= EV with free perfect info-EV without information  Managerial interpretation: $39,000 is the absolute maximum that we should pay for any information because that is the cost if the information is perfect Assignment 2:  Based on past few weeks: o Clouseau Classification, TV Flip Flops, Bayesian Affairs o Due March 16 4pm (next Wednesday)


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