Expected Monetary Value (EMV) : Given payoff table with conditional values i.e. Pay offs and probabilities of occurrence of different states of nature it is possible to determine expected monetary value (EMV) for each course of action. The EMV for specified course of action is the weighted average pay off i.e. the sum of product of the pay off for the several combination of courses and states of nature multiplied by the probability of occurrence of each out come.
Suppose there is prior knowledge of probabilities of occurrence of states of nature.
Let P(si) be the probability of occurrence of ith States of nature. I = 1, 2, …, m.
Let aij be pay off for the combination of jth course of action and ith state of nature then EMV of actin Aj is
EMV (Aj) = a1 j P (S1) + a2j P(S2) + ….. + amj P(Sm)
For J = 1, 2, … n
Steps for Calculating EMV :
- Define systematically the state of nature and course of action.
- Find pay off matrix and assign probabilities to all states of nature.
- Calculate EMV for each course of action – using above formula.
- On the basis of this decision obtain the course of action corresponding to the best EMV i.e. maximum profit in case of profit and minimum EMV in case of
loss.
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