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The Value of Information Given Decision Flexibility

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  • M. W. Merkhofer

    (Stanford Research Institute)

Abstract

This paper explores the effect of decision flexibility on the value of information. The usefulness of calculating the value of information under various assumptions concerning decision flexibility is illustrated with a simple economic example. An upper limit to the value of information given some level of flexibility is the expected value of perfect information given undiminished flexibility (EVPIGUF). By approximating an arbitrary smooth value function with a quadratic equation, first order characteristics of the EVPIGUF are identified. Finally, it is shown that sensitivity analysis can be used as a basis for obtaining simplified approximations for EVPIGUF's.

Suggested Citation

  • M. W. Merkhofer, 1977. "The Value of Information Given Decision Flexibility," Management Science, INFORMS, vol. 23(7), pages 716-727, March.
    • Handle: RePEc:inm:ormnsc:v:23:y:1977:i:7:p:716-727
    DOI: 10.1287/mnsc.23.7.716
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    Cited by:

    1. Eeckhoudt, Louis & Godfroid, Philippe & Gollier, Christian, 2001. "Multiple risks and the value of information," Economics Letters, Elsevier, vol. 73(3), pages 359-365, December.
    2. Jeffrey M. Keisler, 2005. "Additivity of Information Value in Two‐Act Linear Loss Decisions with Normal Priors," Risk Analysis, John Wiley & Sons, vol. 25(2), pages 351-359, April.
    3. Zou, Guang & Faber, Michael Havbro & González, Arturo & Banisoleiman, Kian, 2021. "Computing the value of information from periodic testing in holistic decision making under uncertainty," Reliability Engineering and System Safety, Elsevier, vol. 206(C).
    4. Benjaafar, Saifallah & Morin, Thomas L. & Talavage, Joseph J., 1995. "The strategic value of flexibility in sequential decision making," European Journal of Operational Research, Elsevier, vol. 82(3), pages 438-457, May.
    5. Ali E. Abbas & N. Onur Bakır & Georgia-Ann Klutke & Zhengwei Sun, 2013. "Effects of Risk Aversion on the Value of Information in Two-Action Decision Problems," Decision Analysis, INFORMS, vol. 10(3), pages 257-275, September.
    6. Kumar, Ram L., 1999. "Understanding DSS value: an options perspective," Omega, Elsevier, vol. 27(3), pages 295-304, June.
    7. Debarun Bhattacharjya & Léa A. Deleris, 2014. "The Value of Information in Some Variations of the Stopping Problem," Decision Analysis, INFORMS, vol. 11(3), pages 189-203, September.
    8. Zhengwei Sun & Ali E. Abbas, 2014. "On the sensitivity of the value of information to risk aversion in two-action decision problems," Environment Systems and Decisions, Springer, vol. 34(1), pages 24-37, March.

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