Expected Value
Expected Value of Perfect Information (EVPI)
In decision theory, the expected value of perfect information (EVPI) quantifies the maximum amount an individual would be willing to pay to obtain perfect information about an uncertain event before making a decision. EVPI is a crucial concept in economics, particularly in decision-making under uncertainty.
Non-Negativity of EVPI
A fundamental property of EVPI is its non-negativity. This means that the expected value of perfect information cannot be negative. It is necessarily greater than or equal to the expected monetary value (EMV) of a decision without perfect information. This non-negativity arises from the fact that perfect information allows decision-makers to make optimal choices, leading to better outcomes compared to scenarios with imperfect information.
EVPI Calculation
The formula for calculating EVPI is as follows:
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EVPI = EV(PI) – EMV
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where:
* EV(PI) is the expected value of the decision with perfect information
* EMV is the expected value of the decision without perfect information
EVPI Interpretation
A positive EVPI indicates that acquiring perfect information would be beneficial, as it would lead to an increase in the expected value of the decision. Conversely, an EVPI of zero implies that perfect information would not provide any additional value, as the expected value of the decision would remain the same.
EVPI Applications
EVPI finds applications in various fields, including:
* **Investment Analysis:** In investment decisions, EVPI helps determine the value of additional information, such as market research or expert advice, in improving investment outcomes.
* **Healthcare:** EVPI is used to assess the value of diagnostic tests and treatments in improving patient outcomes.
* **Public Policy:** EVPI is employed to evaluate the benefits of implementing new policies or regulations based on the expected reduction in uncertainty.
Conclusion
The expected value of perfect information (EVPI) is a powerful tool for decision-making under uncertainty. Its non-negativity ensures that perfect information is always valuable, and its calculation provides insights into the potential benefits of acquiring additional information. EVPI finds applications in diverse fields, aiding decision-makers in making informed choices and improving outcomes.
References
* Wikipedia. (2023, January 18). Expected value of perfect information. Retrieved from https://en.wikipedia.org/wiki/Expected_value_of_perfect_information
* Deju and Pernille.S. (2020, April 14-16). EVPI (Expected Value of Perfect Information). Retrieved from https://iea-etsap.org/forum/showthread.php?tid=183
* falamiw and prubin. (2022, June 11-12). Can Expected value of perfect information be zero? Retrieved from https://or.stackexchange.com/questions/8525/can-expected-value-of-perfect-information-be-zero
FAQs
Why is EVPI always non-negative?
EVPI is non-negative because perfect information allows decision-makers to make optimal choices, leading to better outcomes compared to scenarios with imperfect information.
What is the formula for calculating EVPI?
EVPI = EV(PI) – EMV, where EV(PI) is the expected value of the decision with perfect information and EMV is the expected value of the decision without perfect information.
What does a positive EVPI indicate?
A positive EVPI indicates that acquiring perfect information would be beneficial, as it would lead to an increase in the expected value of the decision.
What does an EVPI of zero imply?
An EVPI of zero implies that perfect information would not provide any additional value, as the expected value of the decision would remain the same.
In what fields is EVPI commonly applied?
EVPI finds applications in various fields, including investment analysis, healthcare, and public policy.
How does EVPI help in investment decisions?
In investment decisions, EVPI helps determine the value of additional information, such as market research or expert advice, in improving investment outcomes.
How is EVPI used in healthcare?
In healthcare, EVPI is used to assess the value of diagnostic tests and treatments in improving patient outcomes.
What role does EVPI play in public policy?
In public policy, EVPI is employed to evaluate the benefits of implementing new policies or regulations based on the expected reduction in uncertainty.