Question

Identify a situation from your own experience that involves making decisions using expected value, and detail the different options, expectations, and payouts. Discuss the risks involved with those expectations and, if applicable, the payouts. Include in your discussion an explanation of how to determine how much information to gather to minimize uncertainty. Finally, explain which decision should be made.

Your journal entry must be at least 200 words in length. No references or citations are necessary.

Answer 1

The following is a situation from personal experience where I had to decide based on expected value and payout etc.

I used to work part time at a retail store. The wage was close to minimum wage only. I was working there so that I could save enough money for an expensive gaming PC I wanted to buy. After a few months I was able to save enough money, close to a couple thousand dollars, to get the PC. While at the surface it seemed obvious to get the PC, the following factors came into consideration-

· Given that I was working part-time, I didn’t have much time left in a day. If I bought a gaming PC and wanted to play games on it, I will either have to cut back on my job time or leave the job altogether. This became the opportunity cost of getting the PC and playing games on it.

· On the other hand, if I did get a PC but was unable to play on it due to my job commitment, it would go to waste. Its expected payoff would be zero.

So effectively, my expected payoff from the PC was going to be far lower than what the surface level analysis would suggest, as I would lose out on the job money if I bought and played on it. The decision depended on the utility of playing games vs the utility of earning more money. At the end I decided to quit the job because at that time I felt that playing games gave me more utility (as it was for which I got the job in the first place, after all).