The Value of Information and Control

Abstract

Using a simple example, this short note demonstrates how to place a monetary value on information and control. The monetary value is the change in expected monetary value due to the change in some action taken by the decision maker.

Excerpt

UVA-QA-0468

Rev. Sept. 23, 2010

THE VALUE OF INFORMATION AND CONTROL

In many decision situations, information and control can be very valuable. Here we show how to place a monetary value on information based on the change in some action taken by the decision maker that improves the expected monetary value. We treat the very best information possible, namely perfect information, as if coming from a clairvoyant. We then show how to place a monetary value on perfect control, wherein we choose the outcome, rather than simply learn what it will be.

Vicky's Venture

Vicky's old college friends are planning to start a new venture, and they would like her to come in as an investor. Vicky has some family money that would allow her to invest $ 100,000. The value of the venture depends on whether her friends can obtain approval and a license from the city to operate a new cable company. Vicky believes that she will receive the equivalent of $ 200,000 from the venture if they are successful in getting approval. Otherwise, she'll get back the equivalent of half of her original investment. Based on her decision tree shown below, she plans to make the investment.

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Keywords: management science