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  • 0:00 Information Cost
  • 1:17 Perfect & Sample Information
  • 2:35 Calculations
  • 4:01 Lesson Summary
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Evaluating the Expected Value of Sample Information

Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Many companies consider doing surveys and market research but are not sure whether the expense is worth the data that will be collected. This lesson helps explain how to calculate the expected value of sample information.

Information Cost

Imagine that you are a hospital administrator. It's your job to make sure that the hospital runs smoothly, efficiently, and at the lowest possible cost. You've heard of a new blood test to screen patients for infections and other blood-borne problems. It is just as accurate as the blood test that you are currently using, but it might end up costing your hospital less.

Sounds like a good deal, right? But wait! The test might end up being less accurate or more expensive than you think. You want to know how it will work out in your hospital before you make a decision. In other words, you need more information.

Businesses in all sectors have to make decisions, and the more information they have, the better their decision-making can be. But information has costs: time, money, and other resources. For example, let's say that you decide to try out the new test on 100 hospital patients before completely switching over to using it for all patients. That test will cost you time, money, and also could be a problem if you discover that the new test isn't as accurate and more of the 100 patients end up sick.

So, how much is information worth? Should you do the test run or not? To figure that out, let's look at the value of information and how businesses like yours use it to help them make decisions.

Perfect & Sample Information

What would you pay to know if your decision is the right one? That's the real question you're asking yourself when you're asking how much information is worth. There are two ways of looking at it.

The expected value of perfect information, or EVPI, is a theoretical number that says how much a business should pay to know with certainty the outcome of a decision. Perfect information involves knowing for sure what will happen, and that's always theoretical; there's no way to know for sure what will happen.

Take the new blood test. The EVPI would be the price you would pay to run a study that would tell you exactly how accurate and how expensive the new test will be for your hospital. But since there's always some variance, EVPI is really just hypothetical.

On the other hand, the expected value of sample information, or EVSI, is a real number that says how much actual information is worth. That is, it will tell you how much money you should pay for results from an actual test, survey, or other form of data collection.

The EVSI, then, tells you how much you should pay to do the test run in your hospital. Trying the new blood test out won't provide perfect information because when you move from the 100 patients in the test to the whole hospital, it could result in other problems, but it will give you more information than you have now.

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