Problem
An export company, in the face of the current global economic crisis, is deciding whether to divest from the business, outsource locally its production, or move operations to China. The pay offs for these three options is highly dependent on how soon the economy will recover from the economic crisis. Opinions of experts on this issue ranged from the optimistic scenario that predicts a quick recovery for the world to a more conservative scenario that predicts recovery after a couple o years to, finally, the pessimistic scenario that predicts a prolonged recession. The expected payoffs for each course of action under the three scenarios are presented below.
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Payoff Table
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Prolonged Recession
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Recovery in 2 years
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Quick Recovery
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Divest from company
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15600
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23400
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35100
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Outsource Production
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-20000
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40000
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55000
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Move Production
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-60,000
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10000
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110000
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Which course of action seems best for each of the below-listed criteria for decision-making? List the relevant payoffs and choose the best option under each criterion.
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CRITERIA
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Divest from Company
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Outsource Production
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Move Production
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Best Value
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Maximax
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Maximin
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Minimax
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EMV*
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Assume a probability of 0.25 for prolonged recession, 0.4 for recovery in 2 years, and 0.35 for quick recovery.
What is the expected payoff if we have perfect information?
What is the value of perfect information?