The marketing department of a soft-drink company wishes to determine the maximum expected payoff from introducing a new crystal-clear drink.
Assume that the marketing department works in a risk taking company. Which decision would they likely pursue? (MaxiMax)
Calculate the opportunity lost table. Assume that the marketing department works in a risk adverse company. Which decision would they likely pursue? (MiniMax)
Assume the company has no preconceived assessment with regard to states of nature probabilities. What decision would they likely pursue given they assumed all states of nature had equal probabilities? (Equally likely)
Assume that the probability that the market share is less than 1% is 20%, that the probability that market share is at least 1% and less than 4% is 50%, and that the probability that the market share is at least 4% is 30%. What decision with the company likely pursue considering these assessments of states of nature probabilities? (Expected value)
What is the expected value of perfect information (EVPI) for this last calculation?
Investment <1% 1% to 4% >=4%
Low $300,000.00 $400,000.00 $500,000.00
Medium $(100,000.00) $900,000.00 $1,000,000.00
High $(400,000.00) $300,000.00 $3,000,000.00
This solution explains which decision a business should take if they're risk takers.