Refer to the Following Payoff Table

question 69

Multiple Choice

Refer to the following payoff table:

There is an option of paying $100 to have research done to better predict which state of nature will occur. When the true state of nature is S1, the research will accurately predict S1 60% of the time. When the true state of nature is S2, the research will accurately predict S2 80% of the time.
Given that the research is not done, what is the expected payoff using Bayes' decision rule?

• A) 0
• B) 29
• C) 40
• D) 75
• E) 100

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Definitions:

Escalation of Commitment

The tendency to continue to invest in a decision or project despite evidence of its failure, often due to emotional attachment or sunk costs.

Prospect Theory

A psychological theory that describes how people choose between probabilistic alternatives that involve risk, where the potential for losses is weighted more heavily than equivalent gains.

Losing

The state or condition of not winning, often involving missing out on a prize, goal, or desired outcome.

Gaining

The process of acquiring or increasing something, often used in the context of knowledge, skills, or assets.