## the independence of the two factors in the value of information

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• I m teaching decision making now, and the students have this question about information value that I m having trouble answering. RN2 p602 says that information
Message 1 of 2 , Jan 27, 2006
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I'm teaching decision making now, and the students have this question

RN2 p602 says that information has value to the extent that it is
likely to cause a chagne of plan and to the extent that the new plan
will be significantly better than the old plan. Are these independent?

I'm trying to come up with a intuitive example of this, and I'm having
trouble coming up with a situation in which the information is
unlikely to affect your decision, but the information might result in
a significantly better decision.

I came up with the idea of buying a DVD player, choosing between going
to get it at best buy (A) and circuit city (B). The information in
question is the exact prices at these stores. The agent knows the
price ranges.

Situation 1:
A: \$10-80
B: \$15-98

In this case, it's likely to affect your decision and you could save a
lot of money because of it. The information is worth most in this case.

Situation 2:
A: \$48-51
B: \$49-53

It's likely to affect your decision, but the difference is not big, so
the decision doesn't really matter, so the information is not worth as
much.

Situation 3:
A: \$30-50
B: \$48-60

Unlikely to affect decision, because A is so much more likely to be
cheaper, AND the price ranges are so close that you don't save much
money. Information worth the least in this case.

Situation 4:
A: ??
B: ??

I want an example in which it's unlilkely to affect your decision but
the decision could be significantly better given the information. I
was thinking
A: \$10-51
B: \$68-98
but it seems with such a little overlap it's hard to say that the
change in decision will be important. How can it not affect your
decision and also result in a significantly better outcome?

• It s not really about whether or not the information would change your decision, it s that the answer is **unlikely** to change your decision. It s tough to
Message 2 of 2 , Jan 29, 2006
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It's not really about whether or not the information
**unlikely** to change your decision. It's tough to
illustrate when you have a pretty flat probability
distribution as implied by your DVD example.

Harry's Bargain Electronics sells the DVD players for
\$99, but they're running a special promotion where
Crazy Ron's sells the same DVD player for \$50, but
everyone has to pay. In this example the
"information" is whether or not you would be one of

Madame Trelawney the psychic is able to tell you with
100% certainty whether or not you will be one of the
lucky ones to get a freebie if you buy from Harry's.
How much would you pay her for that knowledge?

While the information could cause a significant
difference in the relative expected values of the two
choices (\$99-\$50 vs. \$0-\$50), it's **unlikely** that
you're going to get a freebie, so the information
itself isn't terribly valuable. It's **very**
valuable **if** you're going to be the winner. But,
999 times out of 1000 you'll find out you're not going
to be a winner. In that case you'd just go to Crazy
Ron's, which is the same decision you'd make without
the information.

Rob G.

--- Jim Davies <jim.davies@...> wrote:

> I'm teaching decision making now, and the students
> have this question
> about information value that I'm having trouble
>
> RN2 p602 says that information has value to the
> extent that it is
> likely to cause a chagne of plan and to the extent
> that the new plan
> will be significantly better than the old plan. Are
> these independent?
>
> I'm trying to come up with a intuitive example of
> this, and I'm having
> trouble coming up with a situation in which the
> information is
> unlikely to affect your decision, but the
> information might result in
> a significantly better decision.
>
> I came up with the idea of buying a DVD player,
> choosing between going
> to get it at best buy (A) and circuit city (B). The
> information in
> question is the exact prices at these stores. The
> agent knows the
> price ranges.
>
> Situation 1:
> A: \$10-80
> B: \$15-98
>
> In this case, it's likely to affect your decision
> and you could save a
> lot of money because of it. The information is worth
> most in this case.
>
> Situation 2:
> A: \$48-51
> B: \$49-53
>
> It's likely to affect your decision, but the
> difference is not big, so
> the decision doesn't really matter, so the
> information is not worth as
> much.
>
> Situation 3:
> A: \$30-50
> B: \$48-60
>
> Unlikely to affect decision, because A is so much
> more likely to be
> cheaper, AND the price ranges are so close that you
> don't save much
> money. Information worth the least in this case.
>
> Situation 4:
> A: ??
> B: ??
>
> I want an example in which it's unlilkely to affect
> the decision could be significantly better given the
> information. I
> was thinking
> A: \$10-51
> B: \$68-98
> but it seems with such a little overlap it's hard to
> say that the
> change in decision will be important. How can it not
> affect your
> decision and also result in a significantly better
> outcome?
>
>
>
>
>
>
>
>

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