To maximize profits the Expected Monetary Value (EMV) is adopted and to minimize losses we would adopt the Expected

Opportunity Loss criterion (EOL) and to maximize returns we would compute it through the Expected Value of Perfect Information (EVPI) criterion.

EXPECTED MONETARY VALUE (EMV) CRITERION:

The EMV for a given course of action is the weighted sum of possible payoffs for each alternative. It is obtained by summing the payoffs for each course of action multiplied by the probabilities associated with state of nature.

It consists of the following steps: 1. Construct a payoff table listing the alternative decisions and the various state of nature. Enter the conditional profit for each decision event combination along with the associated probabilities. (construct the conditional profit table) 2. Calculate the EMV for each decision alternative by multiplying the conditional profits by assigned probabilities and adding the resulting conditional values. (construct expected profit table) 3. Select the alternative that yields the highest EMV.

EXPECTED OPPORTUNITY LOSS (EOL) CRITERION:

EOL represents the amount by which maximum possible profit will be reduced under various possible stock actions. The course of action that minimize these losses or reductions is the optimal decision alternative. The procedure to calculate EOL is as follows: Prepare the conditional profit table for each decision-event combination and write the associated probabilities. (construct the conditional profit table) For each event determine the conditional opportunity loss (COL), by subtracting the payoff from the maximum payoff for that event. (construct the conditional loss table)

EXPECTED VALUE FOR PERFECT INFORMATION (EVPI):

Perfect information means complete and accurate information about the future demand and that remove all the uncertainty for future. EVPI represents the maximum amount of money the decision maker has to pay to get this additional information about the occurrence of various state of nature before a decision has to be made. The procedure to calculate EVPI is as follows:

Construct conditional profit table with perfect information. Construct expected profit table with perfect information. Determine EVPI from relation, EVPI =EPPI- max EMV.