What Is the Expected Value of Perfect Information?

The expected value of perfect information is a tool that is utilized when trying to ascribe a value to information that changes the decision-making process through the revelation of factors that make a difference in the final decision. TThat is to say the expected value of perfect information is used to find a value for a previously unknown information that is added to data already known that provides the beneficiary of the information with a benefit or advantage that would not have been possible without the application of the extra details. As such, expected value of perfect information is commiserate with the type of modification it makes to already known information. This modification serves as the basis for coming up with a stated amount for the value of the information provided to the beneficiary.

An example of the application of expected value of perfect information can be seen in a situation whereby a company in the United States that is trying to open a branch in Hong Kong hires an international business consultant to provide it with information regarding the logistics of the move, the labor laws in the country, the best sites for locating the subsidiary, and the important local business contacts. In this case, the company might already have some information regarding the proposed move to Hong Kong, but it might not have all of the information it needs. As such, the expected value of perfect information would be determined by subtracting the information the company already has from any extra details that the consulting company brings to the table due to the fact that such information will benefit the company.

Another application of the expected value of perfect information can be seen in the case of an investor who is looking for the best industries in which to purchase stocks. Any information from someone hired by the investor for the purpose of determining the merits or lack of merits associated with investing in different industries will be subjected to an analysis with a view to finding the value of the new data provided in the report. As such, the prospective investor will determine the value of the information in terms of the expected benefits he or she will gain from the new information. The expected value of perfect information is really based on the fact that it makes the decision-making process a more confident affair by allowing the person making the decision to have a more balanced or well-rounded view of the situation.