Regret Table Success Moderate Success Failure

Question

Probability 0.3 0.3 0.4
Sell Company 94 50 0
Form Joint Venture 210 0 100
Sell Software on own 0 100 100

Calculate the EOL decision for Sell company

Answer 1

To calculate the Expected Opportunity Loss (EOL) for the option “Sell Company,” we need to first determine the opportunity loss (regret) for each outcome when choosing this option.

Step 1: Calculate the Regret for Each Outcome

The regret is calculated based on what you would have earned if you had chosen the best possible action at that outcome. Here are the outcomes and their values from the regret table:

1. Success:

   • If we "Sell Company": 94
   • If we "Form Joint Venture": 210
   • If we "Sell Software on own": 0
   • Regret = 210 - 94 = 116

2. Moderate Success:

   • If we "Sell Company": 50
   • If we "Form Joint Venture": 0
   • If we "Sell Software on own": 100
   • Regret = 100 - 50 = 50

3. Failure:

   • If we "Sell Company": 0
   • If we "Form Joint Venture": 100
   • If we "Sell Software on own": 100
   • Regret = 100 - 0 = 100

Step 2: Calculate EOL for "Sell Company"

Now we calculate the Expected Opportunity Loss (EOL) for “Sell Company” using the probabilities of each outcome and corresponding regrets.

• Probability of Success = 0.3, Regret = 116
• Probability of Moderate Success = 0.3, Regret = 50
• Probability of Failure = 0.4, Regret = 100

EOL for "Sell Company" can be calculated as follows:

\[ EOL = (P(Success) \times Regret(Success)) + (P(Moderate\ Success) \times Regret(Moderate\ Success)) + (P(Failure) \times Regret(Failure)) \]

Substituting in the values:

\[ EOL = (0.3 \times 116) + (0.3 \times 50) + (0.4 \times 100) \]

Calculating each term:

1. \( 0.3 \times 116 = 34.8 \)
2. \( 0.3 \times 50 = 15 \)
3. \( 0.4 \times 100 = 40 \)

Adding these together:

\[ EOL = 34.8 + 15 + 40 = 89.8 \]

Conclusion

The Expected Opportunity Loss (EOL) for the "Sell Company" decision is 89.8.