Peter J Wilcoxen > PAI 789 Advanced Policy Analysis

Value of Information

Suppose a new medical treatment for a rare disease costs $10,000. However, the benefits of the treatment are uncertain. There is a 10% chance a given patient will respond well (W); if so, the gross benefits (before accounting for the cost) will be $60,000. However, there is a 90% chance the patient will respond poorly (P); in that case, the treatment is actually harmful and the gross benefits will be -$30,000.

  1. What is the expected value of the treatment? Would it be used on a typical patient in the absence of any additional information?
  2. Now suppose there is a test that can be used to tell if a given patient will respond well or poorly before the treatment is administered. What is the value of the test? That is, the maximum a decision-maker would be willing to pay for it.
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 01/27/2020