Question

Napoleon is contemplating four institutions of higher learning as options for a Master’s in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon’s ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Jim and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars.

School	Scenario 1	Scenario 2	Scenario 3
Vanderbilt	95	20	-10
Texas Tech	55	60	60
Seattle	90	10	80
Northeastern State	65	50	6

Suppose that the likelihood for each of scenarios 1 through 3 is 0.3, 0.4, and 0.3, respectively. What is the optimal decision under the EVM criterion?

Answer 1

SOLUTION:

Given That Data Napoleon is contemplating four institutions of higher learning as options for a Master’s in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon’s ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Jim and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution

So

We first create the regret table,

School	Scenario 1	Scenario 2	Scenario 3
Vanderbilt	95-95 = 0	60-20 = 40	80-(-10) = 90
Texas Tech	95-55=40	60-60 = 0	80-60 = 20
Seattle	95-90 = 5	60-10 = 50	80-80 = 0
Northeastern State	95-65 = 30	60-50 = 10	80-60 = 20

Now expected opportunity loss is computed as follows,

School	Scenario 1	Scenario 2	Scenario 3	EOL
Vanderbilt	0	40	90	40*0.4+90*0.3 = 43
Texas Tech	40	0	20	40*0.3+20*0.3 = 18
Seattle	5	50	0	5*0.3+50*0.4 = 21.5
Northeastern State	30	10	20	30*0.3+10*0.4+20*0.3 = 19
Probability	0.3	0.4	0.3

The minimum value is given by Texas Tech. Thus, it will be optimal to choose Texas Tech under the expected opportunity loss criterion.