Indexing profitability

Chapter 15: Risk Analysis: Walking Through the Fog

Global Airlines should reduce fares because its expected monetary value is $50.6565 million. That’s higher than the expected monetary value of keeping the same fares — $49.9275 million — and the expected monetary value of raising fares — $47.1821 million.

9. Calculate the expected monetary value for reducing fares, keeping the same fares, and increasing fares given a negative (Ne) consultant’s report.

Expected monetary values based upon posterior probabilities must also be calculated for the other possible forecasts — you need to know what decision you’ll make if the consultant’s report is negative instead of positive. Remember to use the posterior probabilities associated with a negative consultant’s report.

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10. Choose the action with the highest expected monetary value given a negative consultant’s report.

Global Airlines should charge the same fares because its expected monetary value is $48.1083 million. That’s higher than the expected monetary value of reducing fares — $45.0375 million — and the expected monetary value of raising fares — $46.421 million.

11. Determine the value of the consultant’s report.

The consultant’s report affects your decision. If it’s positive, you’ll reduce fares, and if it’s negative, you’ll charge the same fares. Multiply the expected payoff of your decision by the probability of getting a consultant’s report that leads to that decision.