John is considering investing in a startup company that make

John is considering investing in a start-up company that makes smart phone accessories. If next year’s demand for smart phones is strong, then this investment plan can realize a net profit of $100,000. If next year’s demand for smart phones is weak, then this investment plan would result in a $50,000 loss. In the absence of data, John’s best guess is that there is a 56% chance that the demand for the smart phones is going to be strong. Of course John also has the option of not investing in the plan, which will lead to no gain/loss.

Suppose John has been approached by a market researcher who offers to perform a consumer survey to evaluate next year’s smart phone demand. The market researcher’s past records show that among the smart phones that had strong demand, 88% had positive consumer survey outcomes. Among the smart phones that had weak demand, 72% had negative consumer survey outcomes.

Find the maximum worth of the market researcher\'s information (EVSI).

Solution

EVSI = EMV with free information EMV without information

       = 0.88*100000-0.72*50,000=52000