Risk, Importance and Value of Information
Speaker: Emanuele Borgonovo, Bocconi University, Department of Decision Sciences
Abstract:Decisions involving significant budgetary and public consequences expose decision makers to complex cognitive tasks. The decision making process can be simplified by the specification of an acceptable level of risk. Once a decision has been made, the knowledge of events whose occurrence significantly impacts the baseline level of risk is gathered through risk importance measures. However, risk importance measures fail to convey information before a decision is made. We introduce a value of information approach that bridges this gap leading to a new importance measure. Our results establish an explicit link between risk metrics, risk importance measures and acceptable risk targets. We obtain analytically the expression of value of information as a function of the acceptable risk and of the probability of evidence, specifying the regions where it is increasing and decreasing. This result adds to previous literature on the dependence between value of information and its determinants. The new importance measure presents several advantages: it does not impose additional computational burden, it is computed without specifying the decision maker utility function, it makes importance measures, for the first time, usable also in a pre-decision setting, augmenting the palette of tools available in a relevant class of complex decision analysis problems. A realistic application illustrates the managerial insights.
Joint work with Alessandra Cillo, Bocconi University, Department of Decision Sciences and IGIER
Thursday, July 16th, 11:30 am – 12:30 pm