Class #23 Decision Analysis: Wrap-Up

23.1.4 Bayesian Updating. . .

Wes has found an online database service that will ask him questions, then generate probabilities that he
will drive 60K, 75K or 90K during the next 3 years. The firm providing this service specializes in assisting
people make the best decision on car leases, and they have built up a considerable database during their
past five years of operation. They constantly refine their model, based on feedback from clients.

The firm charges $50 for their services. Their website has information on their track record, which ap-
pears to be quite impressive. They also offer a money-back guarantee if not satisfied. Here is their “track
record” table, based on previous forecasts and actual subsequent driving distances:

Forecast / Drove Drove 60K Drove 75K Drove 90K

Forecast 60K 0.50 0.15 0.10
Forecast 75K 0.30 0.60 0.20
Forecast 90K 0.20 0.25 0.70
This looked so impressive that Wes decided to use the service. After completing the on-line question-
naire, they recommend he take the lease based on 75K. Was this a wise choice that Wes made (to spend
$50 for their service)? Calculate his revised EV, based on this new information, and determine how much
he saved (or lost).

Skeleton Table. . .
I2 (75K) Prior Conditional Joint Posterior
Indicated Probability Probability Probability Probability
P(Si ) P(I2 | Si ) P(I2 and Si ) P(Si | I2)
S1
60,000 km

S2
75,000 km

S3
90,000 km

Marginal ⇒
Probability ⇒
P(I2) ⇒
What is Wes’ revised expected cost for leasing the car?

Did Wes make a good decision? Hint: compare his cost without sample information to his cost with sample
information.

BU 275 Business Decision Models Page 109 of 121