Chapter 12

Value of Information

Chapter 12, Value of information

Learning Objectives:
Probability and Perfect Information
The Expected Value of Information
Expected value of Imperfect Information
Value of information in Complex Problems
Value of information and Experts
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Chapter 12,Value of Information

Decision Maker often gather information to
reduce uncertainty
Information gathering includes:
Consulting experts, conducting surveys
Performing mathematical or statistical analysis
Doing research, or simply reading books,
journals, and newspapers.
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Value of Information
Value of Information: Some Basic Ideas
Probability and perfect information
Use conditional probabilities and Bayes
theorem to evaluate information in any
decision setting.

Value of Information
The Expected Value of Information
By considering the expected value, we can
decide whether:
An expert is worth consulting
Whether a test is worth performing
Or which of several information sources would
be the best to consult.
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The Expected Value of

Information
The worst possible case:
Regardless of the information we hear, we
still would make the same choice that we
would have made in the first place.
In this case, the information has zero
expected value.

The Expected Value of

Information
Make a difference choice, then the expected
value of the information must be positive
The expected value of information can be
zero or positive, but never negative.
Different people in different situation may
place different values on the same
information
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Expected Value of Perfect

Information
The optimal choice in any decision making
situation is the one with the highest
Expected Monetary Value (EMV)
How much would he be willing to pay for
information that would help you to make
the right decision?

Expected Value of Perfect

Information
To find the value of these information, find
the EMV for each situation and then
subtract them.
We can interpret this quantity as the
maximum amount that the investor should
be willing to pay for perfect information.

Expected Value of Imperfect

Information
We rarely have access to perfect
information.
In fact, our information sources usually are
subject to considerable error.
Thus, we must extend our analysis to deal
with imperfect information.
We still consider the expected value of the
information before obtaining it, and we will
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call it the (EVII).

Value of Information in Complex

Problems
In most of previous example there was only
one uncertain event
Most real-world problems involves
considerably more complex uncertainty
models.
In complex situation we must consider two
specific situation
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Value of Information in Complex

Problems
First how to handle continuous probability
distribution
Second, what happen when there are many
uncertain events and information is
available about some or all of them
Evaluate decision option with and without
the information, and find the difference in
the EMV
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Value of Information
Sensitivity Analysis, and Structuring
The first step is using a tornado diagram,
those variables to which the decision was
sensitive.
The second step, after constructing a
probabilistic model, may be to perform
sensitivity analysis on the probabilities.
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Value of Information
A third step in the structuring of a
probabilistic model would be to calculate
the EVPI for each uncertain event.
If EVPI is very low for an event, then there
is little sense in spending a lot of effort in
reducing the uncertainty by collecting
information.
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Value of Information
But if EVPI for an event is relatively high, it
may need to collecting of information
Such information can have a relatively large
payoffs by reducing uncertainty
This information can also improving the
decision makers EMV.

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Value of Information
Value of Information and Nonmonetary
Objectives
In most cases the only objective that matters
is making money
However in many decision situations there
are multiple objectives.
For example, consider the FAA bombdetection case again.
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Value of Information
FAA was interested in maximizing the
detection effectiveness and passenger
acceptance of the system
while at the same time minimizing the cost
and time to implementation.
Minimizing cost happens to be one of the
objectives.
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Value of Information
The answer would be to find the additional
cost
Additional cost make the net expected value
of getting the information equal to the
expected value without the information
Trade-off always establish to value the
information
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Value of Information
Suppose one objective is to minimize the
decision makers time
Different choices and different outcomes
require different amounts of time from the
decision maker.
Information can be valued in terms of time;

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Value of Information
Value of Information and Expert
Expert information typically is somewhat
interrelated and redundant.
The real challenge in expert use is to
recruiting experts who look at the same
problem from very different perspectives.
Use of expert from different field
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Value of Information
Summary
Make better decisions by considering the
expected value of information
Both influence diagrams and decision trees
can be used for calculating expected values
How to solve value-of-information
problems in more complex situations
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