Value of Information

Value of Information

Value of perfect information is the exact difference between two rolled-back trees.

highlighted = computed this step

Information EV

The perfect-information tree folds back to $75.

EV(with info)=$75EV(\text{with info})=\$75
Information valueThe information tree is compared with the original tree.choices after informationBuildSmallbestHigh12040120Low-203030

Original EV

The original tree folds back to $50.

EV(base)=$50EV(\text{base})=\$50
Information valueThe information tree is compared with the original tree.choices after informationBuildSmallbestHigh12040120Low-203030

Subtract

Value of information is the exact difference between those two expected values.

EVPI=$75−$50\text{EVPI}=\$75-\$50
Information valueThe information tree is compared with the original tree.choices after informationBuildSmallbestHigh12040120Low-203030

EVPI

The value of perfect information is $25. Interpretation: in this model, paying more than that would lower expected value.

EVPI=$25\text{EVPI}=\$25
Information valueThe information tree is compared with the original tree.choices after informationBuildSmallbestHigh12040120Low-203030