Quantitative Analysis for Management, 13/e

M3.2 Expected Value of Perfect Information and the Normal Distribution

Let’s return to the Barclay Brothers problem to see how to compute the expected value of perfect information (EVPI) and expected opportunity loss (EOL) associated with introducing the new game. The two steps follow.

Two steps to Compute EVPI and EOL

1. Determine the opportunity loss function.

2. Use the opportunity loss function and the unit normal loss integral (given in Appendix M3.2 at the end of this module) to find EOL, which is the same as EVPI.

Opportunity Loss Function

The opportunity loss function describes the loss that would be suffered by making the wrong decision. We saw earlier that Rudy’s break-even point is 6,000 sets of the game Strategy. If Rudy produces and ...