In Chapter 3, we begin to look at how to use data to make decisions. It is not enough to say, "the answer is $2,100." Rather, what do we do with this information to make good choices?
Your assignment for this discussion section is to learn how to use the Expected Monetary Value (EMV) to help you make decisions. Here's your task:
You have been asked to decide whether your company should build a new factory in Alabama.If you build it and things go well, you could make a lot of money, but if the economy goes bad, you could lose a lot of money (and maybe your job, too).
If you choose not to build it and the economy goes bad, you've made the right decision because you haven't lost any money. On the other hand, if you don't do anything and the economy does really well, you've missed a terrific opportunity to make a profit. How do you use the EMV to do this? Let me show you...Here's your grid:
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Outcomes
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Good Economy
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Bad Economy
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Your Choices:
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o Build the factory
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A
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B
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o Don't build the factory
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C
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D
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Probabilities
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P1
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P2
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1. From the following choices, randomly pick how much money you would make if you chose to build the factory and things went really well. (You can't go wrong with any choice; just pick one.J) Put that amount in Box "A." (value: 5 points) Box "A" choices
$100,000
$75,000
$50,000
$125,000
$65,000
$200,000
$105,000
$90,000
$45,000
2. From the following menu, pick how much money you would lose if you chose to build and the economy went down. (As with Step 1, you can't go wrong with any choice; just pick one.J) Put that amount in Box "B."
Box "B" choices
-$100,000
-$85,000
-$55,000
-$115,000
-$165,000
-$105,000
-$75,000
-$45,000
-$110,000
3. Put zeroes ("0") in Boxes "C" and "D" because you aren't doing anything that would let make or lose money.
4. Choose one of the possible combinations of probabilities. (Again, just choose one of these nine choices; you can't go wrong.) Put the value of P1 (the chance of a good economy) in Box "P1." Put the value of P2 (the chance of a bad economy) in Box "P2." (Note how both numbers always add to 100 %.)
Choices for Box P1 and Box P2
o P1 = 75% P2 = 25%
o P1 = 55% P2 = 45%
o P1 = 66% P2 = 34%
o P1 = 70% P2 = 30%
o P1 = 50% P2 = 50%
o P1 = 40% P2 = 60%
o P1 = 10% P2 = 90%
o P1 = 45% P2 = 55%
o P1 = 25% P2 = 75%
5. Now that you've made your choices and have a complete grid, use your notes to do an EMV with the data you've entered. Use the Discussion Board to answer the following:
a. What EMV amount do you come up with?
b. What is your EMV decision? In other words, do you build, or not?