Learning decision analysis (DA) is boring and dry.
It doesn't have to be if we put a fun spin on it. DA takes a limited set of options, applies values, costs, and probabilities to each, and makes a decision based on highest "expected value".
Figuring out which widget a company should manufacture is mind numbing. Instead, let's decide if we should jump the fence for the next concert we go to!
What's a live concert worth to you?
Your favourite band is playing a gig, but $150 tickets are too expensive. You'd be willing to pay $100. So you have 3 choices:
- Watch live on TV. This has a 100% chance of not going, $0 cost, but 10% of the fun.
- Buy a ticket. 100% chance of having a great time and spending $150.
- Jump the fence. 80% chance you see the concert, 20% chance you get caught and fined $300.
Decision Analysis tells us to evaluate each option's Expected Value (EV) with this formula:
EV = [Probability OutcomeA x Expected Payoff) + (Probability OutcomeB x Expected Payoff)
Remember, Expected Payoff is the value of the concert to you ($100 live or $10 on TV) less any costs.
Calculate Expected Values
Skipping EV: [100% x ($10-$0)] = $10
Paying EV: [100% x ($100-$150)] = -$50
Fence Jump EV: [80% x $100] + [20% x -$300] = $80 - $60 = $20
Jump the Fence
Decided, you should jump the fence because it has the highest expected value outcome of all the options.
Moral of the Story
Yay, now you know how to do Decision Analysis.
BUT not everything can be expressed in dollars and cents. Morals matter too.
I'll make this decision easy for you - buy the ticket!
You'll feel good and support artists, and I promise you actually undervalued the fun of being there live!