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Expected Value Public Administration and Policy

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1 Expected Value Public Administration and Policy
PAD634 Judgment and Decision Making Behavior Expected Value Thomas R. Stewart, Ph.D. Center for Policy Research Rockefeller College of Public Affairs and Policy University at Albany State University of New York Copyright © Thomas R. Stewart

2 Expected value Expected Value = P(O1)V(O1) + P(O2)V(O2) + P(O3)V(O3) +
P(Oi) is the probability of outcome i V(Oi) is the value of outcome i ExpectedValue.ppt

3 Expected value One of many possible decision making rules
The basis for decision analysis ExpectedValue.ppt

4 Hypothetical concrete pouring example
Suppose that Jill is a contractor who pours concrete for foundations. She does not want to pour if it will rain before the concrete sets. ExpectedValue.ppt

5 Example of quantitative model: Concrete (flat-work) contractor
Decision Don’t pour Pour Event Idle crew (-700) Remove ruined concrete and redo job (-5500) Rain Idle crew (-700) Successful pour (2000) No rain ExpectedValue.ppt

6 Decision tree for concrete pouring example: No forecast
-5500 Rain .26 E.V. = Expected Value = .26  (-5500)  (2000) = 50 E.V. = 50 2000 No rain .74 Pour -700 Don't pour With only climate information, decision is always to pour: Expected value = 50 ExpectedValue.ppt

7 Expected value Expected Value = P(O1)V(O1) + P(O2)V(O2) + P(O3)V(O3) +
P(Oi) is the probability of outcome i V(Oi) is the value of outcome i ExpectedValue.ppt

8 Descriptive model of Jill's decision making process
Jill looks at the sky in the morning and does not pour if it is cloudy. Rule 1: If cloudy, do not pour. Rule 2: If not cloudy, pour. ExpectedValue.ppt

9 Characteristics of cloudiness as predictor of rain
ExpectedValue.ppt

10 Decision tree for concrete pouring example: Simple forecast
Value of information = = 90 -5500 2000 Rain No rain .20 .80 E.V. = 500 E.V. = 140 Pour (sky is clear) .70 Look at sky -700 Don't pour (clouds) .30 ExpectedValue.ppt

11 Probability of precipitation (POP) forecast
Jill decides to use the forecast. She will not pour anytime the forecast indicates a 10% chance of rain or greater. ExpectedValue.ppt

12 Jill’s value of information 230 - 140 = 90
Decision tree for concrete pouring example: POP forecast with Jill’s decision rule Jill’s value of information = 90 -5500 2000 Pour (POP < .10) Rain No rain .40 .05 .95 E.V. = 1625 E.V. = 230 Obtain POP forecast -700 Don't pour (POP  .10) .60 ExpectedValue.ppt

13 Prescriptive decision making process with forecast
Expected value = 590 Pour if forecast is .20 or below ExpectedValue.ppt

14 Summary Climate information only E.V. = 50 Look at sky E.V. = 140
POP forecast, Jill’s cutoff E.V. = 230 POP forecast, optimal cutoff E.V. = 590 ExpectedValue.ppt

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