_{I}_{E}_{E}_{E} _{T}_{R}_{A}_{N}_{S}_{A}_{C}_{T}_{I}_{O}_{N}_{S} _{O}_{N} _{S}_{Y}_{S}_{T}_{E}_{M}_{S} SCIENCE AND CYBERNETICS
_{b}_{e} _{a}_{s}_{s}_{o}_{c}_{i}_{a}_{t}_{e}_{d} with particular obstacle categories. Subgoals
are concerned with the amount of resources to be applied _{t}_{o} _{a}_{c}_{h}_{i}_{e}_{v}_{e} _{t}_{h}_{e} _{p}_{r}_{i}_{m}_{a}_{r}_{y} _{g}_{o}_{a}_{l}_{s}_{.} _{B}_{o}_{u}_{n}_{d}_{a}_{r}_{y} conditions are
_{g}_{i}_{v}_{e}_{n} _{b}_{y} _{t}_{h}_{e} _{s}_{t}_{a}_{t}_{e}_{s} _{t}_{h}_{e}_{m}_{s}_{e}_{l}_{v}_{e}_{s} in combination with ob stacle categories, so that each problem has two centers of
interest, the associated system state and the cause of that
particularstate.
CONCLUSION _{I}_{n} _{c}_{o}_{n}_{c}_{l}_{u}_{s}_{i}_{o}_{n} _{o}_{f} _{t}_{h}_{i}_{s} _{d}_{i}_{s}_{c}_{u}_{s}_{s}_{i}_{o}_{n} of Problem Formulation
the Exploration of Obstacles forms the last half of the step,
_{b}_{e}_{i}_{n}_{g} _{p}_{r}_{e}_{c}_{e}_{d}_{e}_{d} _{b}_{y} Statement _{C}_{l}_{a}_{r}_{i}_{f}_{i}_{c}_{a}_{t}_{i}_{o}_{n}_{.} While Explora
_{t}_{i}_{o}_{n} _{o}_{f} _{O}_{b}_{s}_{t}_{a}_{c}_{l}_{e}_{s} alone contains the generation and ranking _{o}_{f} _{p}_{r}_{o}_{b}_{l}_{e}_{m}_{s} _{w}_{h}_{i}_{c}_{h} _{a}_{r}_{e} the _{o}_{b}_{j}_{e}_{c}_{t}_{s} of _{t}_{h}_{e} Problem Formula _{t}_{i}_{o}_{n} _{s}_{t}_{e}_{p} of _{a} _{s}_{y}_{s}_{t}_{e}_{m} _{s}_{t}_{u}_{d}_{y}_{,} it relies basically upon a clear _{i}_{n}_{t}_{e}_{r}_{p}_{r}_{e}_{t}_{a}_{t}_{i}_{o}_{n} of _{t}_{h}_{e} Problem Statement as a system. It is _{d}_{u}_{r}_{i}_{n}_{g}_{S}_{t}_{a}_{t}_{e}_{m}_{e}_{n}_{t} ClarificationthattheProblem Statement _{i}_{s} _{r}_{e}_{w}_{o}_{r}_{k}_{e}_{d} _{f}_{r}_{o}_{m} an imprecise but intuitive and idealized _{d}_{e}_{s}_{c}_{r}_{i}_{p}_{t}_{i}_{o}_{n} _{o}_{f} _{a} _{g}_{o}_{a}_{l} _{i}_{n}_{t}_{o} a formal _{b}_{u}_{t} still _{r}_{a}_{t}_{h}_{e}_{r} abstract
definition of a system. In this process, some concepts of
_{s}_{y}_{s}_{t}_{e}_{m} _{t}_{h}_{e}_{o}_{r}_{y} _{a}_{n}_{d} _{s}_{y}_{m}_{b}_{o}_{l}_{i}_{c} _{l}_{o}_{g}_{i}_{c} are useful tools: the
VOL. SSC2, NO. 1
AUGUST, 1966
_{n}_{o}_{t}_{i}_{o}_{n} _{o}_{f} _{a} _{s}_{t}_{a}_{t}_{e}_{m}_{e}_{n}_{t} _{o}_{r} _{s}_{e}_{n}_{t}_{e}_{n}_{c}_{e} as a proposition, the
requirements of a statement which defines a system, and
_{t}_{h}_{e} idea of the states of a system. As a final comment, it
_{s}_{h}_{o}_{u}_{l}_{d} _{b}_{e} _{n}_{o}_{t}_{e}_{d} _{t}_{h}_{a}_{t} Exploration of Obstacles requires
_{m}_{e}_{t}_{h}_{o}_{d}_{s} for determining and scaling need for various operational features in the system, and suitable theoretical _{t}_{e}_{c}_{h}_{n}_{i}_{q}_{u}_{e}_{s} _{c}_{a}_{n}_{n}_{o}_{t} _{a}_{t} _{t}_{h}_{i}_{s} _{t}_{i}_{m}_{e} _{b}_{e} _{n}_{a}_{m}_{e}_{d}_{.} The methodology of Exploration of Obstacles depends, then, on informal
reasonirng.
[1]
[2]
[3]
[4]
[5]
[6]
REFERENCES
A. 
D. Hall, A Methodology _{f}_{o}_{r} Systems Engineering. Priniceton, 

N. _{J}_{.}_{:} _{V}_{a}_{n} Nostrand, 1962. 

_{L}_{.} British J. von Bertalanffy, for the "An outline of general _{s}_{y}_{s}_{t}_{e}_{m} theory," vol. I, no. 2, August Philosophy of Science, 
1950.
_{D}_{.}
0. Ellis
_{a}_{n}_{d} _{F}_{.} _{J}_{.} _{L}_{u}_{d}_{w}_{i}_{g}_{,} Systems Philosophy. New York:
1962.
and
interdisciplinary
research,"
York:
PrenticeHall,
"Systems,
in
organizations,
Systems: Research and
Wiley
F.
B.
1961,
Ch. 2.
Ronald
_{L}_{.}
Design, D. P. Eckman, Ed. New
Fitch, Symbolic LogicAn Introduction. New York:
Press,
1952.
System TheoryThe
1963.
_{A}_{.} _{Z}_{a}_{d}_{e}_{h} _{a}_{n}_{d} _{C}_{.} A. Desoer, Linear
State Space Approach. New York:
McGrawHill,
Information Value Theory
RONALD A. HOWARD, SENIOR MEMBER, IEEE
AbstractThe information theory developed by Shannon was
_{d}_{e}_{s}_{i}_{g}_{n}_{e}_{d} to _{p}_{l}_{a}_{c}_{e} a quantitative measure on the amount of in
_{f}_{o}_{r}_{m}_{a}_{t}_{i}_{o}_{n} _{i}_{n}_{v}_{o}_{l}_{v}_{e}_{d} in _{a}_{n}_{y} communication. The _{e}_{a}_{r}_{l}_{y} _{d}_{e}_{v}_{e}_{l}_{o}_{p}_{e}_{r}_{s}
_{s}_{t}_{r}_{e}_{s}_{s}_{e}_{d} _{t}_{h}_{a}_{t} _{t}_{h}_{e} information measure was _{d}_{e}_{p}_{e}_{n}_{d}_{e}_{n}_{t} _{o}_{n}_{l}_{y} on the _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{s}_{t}_{i}_{c} _{s}_{t}_{r}_{u}_{c}_{t}_{u}_{r}_{e} of the communication _{p}_{r}_{o}_{c}_{e}_{s}_{s}_{.} For _{e}_{x}_{a}_{m}_{p}_{l}_{e}_{,} if _{l}_{o}_{s}_{i}_{n}_{g} _{a}_{l}_{l} _{y}_{o}_{u}_{r} _{a}_{s}_{s}_{e}_{t}_{s} in the stock market and _{h}_{a}_{v}_{i}_{n}_{g} whale steak _{f}_{o}_{r} _{s}_{u}_{p}_{p}_{e}_{r} _{h}_{a}_{v}_{e} _{t}_{h}_{e} _{s}_{a}_{m}_{e} _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{t}_{y}_{,} then the information associ
_{a}_{t}_{e}_{d} _{w}_{i}_{t}_{h} _{t}_{h}_{e} occurrence of either event is the same. _{A}_{t}_{t}_{e}_{m}_{p}_{t}_{s} to
Shannon's information theory to problems beyond com
apply
_{m}_{u}_{n}_{i}_{c}_{a}_{t}_{i}_{o}_{n}_{s} _{h}_{a}_{v}_{e}_{,} _{i}_{n} _{t}_{h}_{e} _{l}_{a}_{r}_{g}_{e}_{,} _{c}_{o}_{m}_{e} to _{g}_{r}_{i}_{e}_{f}_{.} The failure of these
_{a}_{t}_{t}_{e}_{m}_{p}_{t}_{s} _{c}_{o}_{u}_{l}_{d} _{h}_{a}_{v}_{e} _{b}_{e}_{e}_{n} _{p}_{r}_{e}_{d}_{i}_{c}_{t}_{e}_{d} _{b}_{e}_{c}_{a}_{u}_{s}_{e} no _{t}_{h}_{e}_{o}_{r}_{y} that involves
_{j}_{u}_{s}_{t} the probabilities of outcomes without considering their con _{s}_{e}_{q}_{u}_{e}_{n}_{c}_{e}_{s} could _{p}_{o}_{s}_{s}_{i}_{b}_{l}_{y} be _{a}_{d}_{e}_{q}_{u}_{a}_{t}_{e} in describing the importance
of uncertainty to a decision maker. It is necessary to be concerned
_{n}_{o}_{t} _{o}_{n}_{l}_{y} _{w}_{i}_{t}_{h} _{t}_{h}_{e} _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{s}_{t}_{i}_{c} _{n}_{a}_{t}_{u}_{r}_{e} _{o}_{f} the uncertainties that sur _{r}_{o}_{u}_{n}_{d} _{u}_{s}_{,} _{b}_{u}_{t} _{a}_{l}_{s}_{o} _{w}_{i}_{t}_{h} _{t}_{h}_{e} _{e}_{c}_{o}_{n}_{o}_{m}_{i}_{c} _{i}_{m}_{p}_{a}_{c}_{t} _{t}_{h}_{a}_{t} these uncertainties will _{h}_{a}_{v}_{e} on us. _{I}_{n} _{t}_{h}_{i}_{s} _{p}_{a}_{p}_{e}_{r} _{t}_{h}_{e} _{t}_{h}_{e}_{o}_{r}_{y} _{o}_{f} _{t}_{h}_{e} _{v}_{a}_{l}_{u}_{e} _{o}_{f} information that arises from considering jointly the probabilistic and economic factors that _{a}_{f}_{f}_{e}_{c}_{t} _{d}_{e}_{c}_{i}_{s}_{i}_{o}_{n}_{s} _{i}_{s} _{d}_{i}_{s}_{c}_{u}_{s}_{s}_{e}_{d} _{a}_{n}_{d} illustrated. It is found that numer _{i}_{c}_{a}_{l} _{v}_{a}_{l}_{u}_{e}_{s} _{c}_{a}_{n} _{b}_{e} _{a}_{s}_{s}_{i}_{g}_{n}_{e}_{d} _{t}_{o} _{t}_{h}_{e} elimination or reduction of _{a}_{n}_{y}
_{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y}_{.} _{F}_{u}_{r}_{t}_{h}_{e}_{r}_{m}_{o}_{r}_{e}_{,} _{i}_{t} _{i}_{s} _{s}_{e}_{e}_{n} _{t}_{h}_{a}_{t} the _{j}_{o}_{i}_{n}_{t} elimination of the
_{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y} _{a}_{b}_{o}_{u}_{t} a number of even _{i}_{n}_{d}_{e}_{p}_{e}_{n}_{d}_{e}_{n}_{t} factors in a prob
lem _{c}_{a}_{n} have a value that differs from the sum of the values of elimi
_{n}_{a}_{t}_{i}_{n}_{g} _{t}_{h}_{e} _{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y} in each factor _{s}_{e}_{p}_{a}_{r}_{a}_{t}_{e}_{l}_{y}_{.}
Manuscript received March _{1}_{,} 1965.
The _{a}_{u}_{t}_{h}_{o}_{r} is Professor
of
EngineeringEconomic Systems,
Stanford University, Stanford, Calif.
NOTATION
A _{S}_{P}_{E}_{C}_{I}_{A}_{L} _{N}_{O}_{T}_{A}_{T}_{I}_{O}_{N} will be used to make as
_{e}_{x}_{p}_{l}_{i}_{c}_{i}_{t} _{a}_{s} _{p}_{o}_{s}_{s}_{i}_{b}_{l}_{e} the conditions underlying the
_{a}_{s}_{s}_{i}_{g}_{n}_{m}_{e}_{n}_{t} of any probability. Thus,
x  a random variable
A _{}_{a}_{n} event
$ _{}_{t}_{h}_{e} _{s}_{t}_{a}_{t}_{e} _{o}_{f} information on which _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{t}_{y}
assignments will be made
_{{}_{x}_{I}_{S}_{}} _{}_{t}_{h}_{e} _{d}_{e}_{n}_{s}_{i}_{t}_{y} _{f}_{u}_{n}_{c}_{t}_{i}_{o}_{n} _{o}_{f} the random variable x
_{g}_{i}_{v}_{e}_{n} _{t}_{h}_{e} _{s}_{t}_{a}_{t}_{e} of information the probability of the event A given the state of
information
_{(}_{x}_{j}_{)} _{} _{t}_{h}_{e} _{e}_{x}_{p}_{e}_{c}_{t}_{a}_{t}_{i}_{o}_{n} _{o}_{f} the random variable _{x}_{,} which
_{b}_{r}_{o}_{u}_{g}_{h}_{t} to the problem, the
{A }
8
equalsf, _{x}_{{}_{x}_{j}_{s}_{}}
= the experience
_{s}_{p}_{e}_{c}_{i}_{a}_{l} state of information represented by total
a priori knowledge _{I} _{x}_{}_{}} = _{t}_{h}_{e} _{d}_{e}_{n}_{s}_{i}_{t}_{y} _{f}_{u}_{n}_{c}_{t}_{i}_{o}_{n} of a random variable x
_{a}_{s}_{s}_{i}_{g}_{n}_{e}_{d} on the basis of only a priori knowledge
_{8}_{;} designated the prior on x.
_{O}_{u}_{r} _{n}_{o}_{t}_{a}_{t}_{i}_{o}_{n} _{d}_{o}_{e}_{s} _{n}_{o}_{t} _{e}_{m}_{p}_{h}_{a}_{s}_{i}_{z}_{e} the difference in
probability assignment to a random variable and to an
_{e}_{v}_{e}_{n}_{t} because the context _{a}_{l}_{w}_{a}_{y}_{s} makes clear the appro
22
1966
_{H}_{O}_{W}_{A}_{R}_{D}_{:} INFORMATION _{V}_{A}_{L}_{U}_{E} THEORY
23
priate interpretation. We should interpret the generalized
_{s}_{u}_{m}_{m}_{a}_{t}_{i}_{o}_{n} symbol _{f} used in the definition of (x 8) as an
_{i}_{n}_{t}_{e}_{g}_{r}_{a}_{l} _{i}_{f} the random variable is continuous and as a summation if it is discrete.
AN INFERENTIAL CONCEPT A most important infererntial concept is expansion; it _{a}_{l}_{l}_{o}_{w}_{s} us to _{e}_{n}_{c}_{o}_{d}_{e} our knowledge in a problem in the
most conveniient form. The concept of expansion permits
_{u}_{s} _{t}_{o} introduce a new consideration into the problem. _{S}_{u}_{p}_{p}_{o}_{s}_{e}_{,} for _{e}_{x}_{a}_{m}_{p}_{l}_{e}_{,} that we must _{a}_{s}_{s}_{i}_{g}_{n} a probability
distribution to a random variable u. We may find it much easier to assign a probability distribution to u if we had
previously specified the value of another random variable v _{a}_{n}_{d} we _{m}_{a}_{y} also find it easy to assign a probability dis
tribution directly to v. In this case the expansion equation,
{uIS} = fu{v I8}{vls}
(1)
_{s}_{h}_{o}_{w}_{s} that all we have
JuvO}
to do to find { _{u}_{J}_{S}_{}} is _{m}_{u}_{l}_{t}_{i}_{p}_{l}_{y}
_{b}_{y} {v s} and sum over all possible values of the
_{r}_{a}_{n}_{d}_{o}_{m} _{v}_{a}_{r}_{i}_{a}_{b}_{l}_{e} v. Alathematically this equation is no
_{m}_{o}_{r}_{e} _{t}_{h}_{a}_{n} _{a} _{c}_{o}_{n}_{s}_{e}_{q}_{u}_{e}_{n}_{c}_{e} of the _{d}_{e}_{f}_{i}_{n}_{i}_{t}_{i}_{o}_{n} of conditional
probability, but in the operational solution of inference _{p}_{r}_{o}_{b}_{l}_{e}_{m}_{s} it is extremely valuable. If we want to find only
_{t}_{h}_{e} _{e}_{x}_{p}_{e}_{c}_{t}_{a}_{t}_{i}_{o}_{n} _{o}_{f} _{u}_{,} _{(}_{u} _{S}_{)}_{,} rather than the entire _{d}_{e}_{n}_{s}_{i}_{t}_{y}
function {
ulS}
we apply expansion in the form,
_{(}_{u}_{l}_{S}_{)} = _{f}_{,}_{u}_{{}_{u}_{l}_{s}_{}} =.rJ,rUU{VI{vJS = fV(UIV8){VIS}. _{(}_{2}_{)}
This _{e}_{q}_{u}_{a}_{t}_{i}_{o}_{n} shows that in this case we must only pro
vide the expectation of u conditional on v and the proba
_{b}_{i}_{l}_{i}_{t}_{y} distribution of v in order to find the _{e}_{x}_{p}_{e}_{c}_{t}_{a}_{t}_{i}_{o}_{n} of u. The inferential concept of expansion allows us to go _{d}_{i}_{r}_{e}_{c}_{t}_{l}_{y} from the statemenit of an inference _{p}_{r}_{o}_{b}_{l}_{e}_{m} to its
solutioin in simple logical steps. It provides a link between
the formalism of probability
theory and the _{p}_{)}_{a}_{t}_{h} of human
reasoning; it is a tool of thought.
A BIDIING PROBLEM
_{T}_{o} illustrate our _{a}_{)}_{p}_{r}_{o}_{a}_{c}_{h} we shall consider a _{s}_{p}_{e}_{c}_{i}_{f}_{i}_{c}
_{p}_{r}_{o}_{b}_{l}_{e}_{m}_{.} _{S}_{u}_{p}_{p}_{o}_{s}_{e} that our company is bidding on a con
tract againist a niumber of competitors. We shall let p be
our _{c}_{o}_{m}_{p}_{a}_{n}_{y}_{'}_{s} cost of performing
oin the contract; un
_{f}_{o}_{r}_{t}_{u}_{n}_{a}_{t}_{e}_{l}_{y}_{,} we are unicertain of this cost. We let t be the
_{l}_{o}_{w}_{e}_{s}_{t} _{b}_{i}_{d} _{o}_{f} _{o}_{u}_{r} _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{o}_{r}_{s}_{,} anid as _{y}_{o}_{u} mnight expect,
this too is uncertain. Our _{p}_{r}_{o}_{b}_{l}_{e}_{n}_{m} is to determinie _{b}_{,} our
_{c}_{o}_{m}_{p}_{a}_{n}_{y}_{'}_{s} _{b}_{i}_{d} oni _{t}_{h}_{e} contract. Our
objective in this
_{d}_{e}_{t}_{e}_{r}_{m}_{i}_{n}_{a}_{t}_{i}_{o}_{n}_{i} is to maximize the _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} value of _{v}_{,} our
company's _{p}_{r}_{o}_{f}_{i}_{t}
Naturally,
or value from the contract.
our _{c}_{o}_{m}_{p}_{a}_{n}_{y} will not wini the _{c}_{o}_{n}_{t}_{r}_{a}_{c}_{t} if its
bid b is _{h}_{i}_{g}_{h}_{e}_{r} than the lowest bid of our competitors f,
_{t}_{h}_{u}_{s}_{,} in this case our companly's profit is zero. However,
if our bid b is less than the lowest competitive bid t our company will obtaini the contract and will make a profit
equal to the diffcrencee between our bi(d b and our cost p. _{T}_{h}_{u}_{s}_{,} profit v to our company is defined by
_{b}_{} _{p} if b _{<} t
_{=}
_
_{0}
if b _{>}
(3)
(3
_{T}_{h}_{i}_{s} _{e}_{q}_{u}_{a}_{t}_{i}_{o}_{n} indicates that the probability distribution of profit given our bid {vbg} _{w}_{o}_{u}_{l}_{d} be _{t}_{r}_{i}_{v}_{i}_{a}_{l} to _{d}_{e}_{t}_{e}_{r}_{m}_{i}_{n}_{e} _{i}_{f} _{w}_{e} only knew our company's cost p and the lowest bid of our competitors _{f}_{,} since by the expansion concept
_{v}_{1}_{,}_{l}_{b}_{&}_{}} = fp,t{vbpft
{
p
,fb&.
_{(}_{4}_{)}
_{I}_{n} _{t}_{h}_{i}_{s} _{e}_{q}_{u}_{a}_{t}_{i}_{o}_{n} _{{}_{p}_{,}_{f}_{}_{b}_{&}_{4} _{r}_{e}_{p}_{)}_{r}_{e}_{s}_{e}_{n}_{t}_{s} the joint distribution of our cost and our _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{o}_{r}_{'}_{s} lowest bid given our bid and the state of knowledge _{&} that we brought to the _{p}_{r}_{o}_{b}_{l}_{e}_{m}_{.} However, since _{w}_{e} are interested only in the _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{p}_{r}_{o}_{f}_{i}_{t} _{b}_{y} _{a}_{s}_{s}_{u}_{m}_{p}_{t}_{i}_{o}_{n} we can write (4) in the expectation _{f}_{o}_{r}_{m}_{,}
(vb&) =fv,t(vfbpf&){p,fjb&}.
_{(}_{5}_{)}
At this point we shall _{m}_{a}_{k}_{c} two assumptions. The first
_{i}_{s} _{t}_{h}_{a}_{t} our cost p and _{t}_{h}_{e} lowest competitor's bid _{t} do not _{d}_{e}_{p}_{e}_{n}_{i}_{d} upon our bid b; that is,
{p,pjbj} = _{{}_{p}_{,}_{t}_{l}_{&}_{)}
(6)
The second assumption is that our cost p is _{i}_{n}_{i}_{d}_{e}_{p}_{e}_{n}_{d}_{e}_{n}_{t} of the lowest competitive bid e, or,
{lp,tl} = {PI}{&0}.
With these assumptions (5r) becomes
(7)
_{(}_{v}_{I}_{b}_{8}_{)} = fv,f(V bpe&){ _{p}_{l} }I { &}.
(8)
In view of (3) we have immediately that the _{e}_{x}_{p}_{e}_{c}_{t}_{a}_{t}_{i}_{o}_{n}_{i} of profit conditional on our bid, our cost, and the lowest
competitive bid is simply
(vIbpfI) = b p if b < t
0
if b _{>}
(9)
_{'}_{1}_{'}_{h}_{e} next _{s}_{t}_{e}_{l}_{)} is to assign prior _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{t}_{y} distributions
{pg}, {4181
to our cost and to the lowest competitive bid.
pJ8}
would be
based _{u}_{p}_{o}_{n} theinformation thatourcompanyhad gathered
The _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{t}_{y} distribution oIn our cost {
in _{p}_{e}_{r}_{f}_{o}_{r}_{m}_{i}_{n}_{g} similar contracts as amenided by the tech
nical conisiderationis involved in the new contract. The
_{p}_{r}_{i}_{o}_{r} distribution _{o}_{n}_{]} the lowest _{(}_{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{v}_{e} _{b}_{i}_{d} { _{t}_{l}_{}}
would be based on our _{e}_{x}_{p}_{e}_{r}_{i}_{e}_{n}_{c}_{e}_{s} in bidding against our
_{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{o}_{r}_{s} oni _{p}_{r}_{e}_{v}_{i}_{o}_{u}_{s} occasioIns arid on other _{i}_{n}_{f}_{o}_{r}_{m}_{a}_{}
tion such as _{r}_{e}_{p}_{o}_{r}_{t}_{s} in the trade _{p}_{r}_{e}_{s}_{s}_{.} Although we shall
not _{h}_{a}_{v}_{e} the _{o}_{p}_{p}_{o}_{r}_{t}_{u}_{n}_{i}_{t}_{y} to _{d}_{i}_{g}_{r}_{e}_{s}_{s} on the _{s}_{u}_{b}_{j}_{e}_{c}_{t} of how these _{a}_{s}_{s}_{i}_{g}_{n}_{m}_{e}_{n}_{t}_{s} are made, suffice it to say that effective
procedures for this _{p}_{u}_{r}_{p}_{o}_{s}_{e} are available.
To gain ease of computation we shall state simply that in this _{p}_{r}_{o}_{b}_{l}_{e}_{m} _{t}_{h}_{e} prior distribution on our company's cost _{p} is a uniform distribution betweeni zero arid one _{a}_{n}_{d}
that our _{p}_{r}_{i}_{o}_{r} distributioni oii _{o}_{u}_{r} _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{o}_{r}_{'}_{s} _{l}_{o}_{w}_{e}_{s}_{t} _{b}_{i}_{d} _{i}_{s}
a uniform distribution betweein zero and two. These )rior
24
IEEE TRANSACTIONS ON SYSTEMS SCIENCE AND CYBERNETICS
AUGUST
{pIa}
{Ii8}
and negative for bids between 0 and 1/2. Formally,
2
_{v}_{j} _{&}_{)} = lMax (vb&) =
b
^{9}
v b = 9t =
4'
32
=
27
_{9}_{6}_{'} (12)
{P P0 I ~
1 p0PoE
_ a PI~~p
I$0~Po~ 1
1
l} 06
{
o
{~AI}
(
2~~~~
2Q
_{W}_{e} _{h}_{a}_{v}_{e}_{,} _{t}_{h}_{e}_{r}_{e}_{f}_{o}_{r}_{e}_{,} _{f}_{o}_{u}_{n}_{d} that the best bidding strategy is
_{t}_{o} _{b}_{i}_{d} _{5}_{/}_{4} _{a}_{n}_{d} that this strategy will have an expected
_{p}_{r}_{o}_{f}_{i}_{t} of 9/32.
CLAIRVOYANCE
I p
I
Po
2
,1
1
10 _{E}_{v}_{e}_{n} _{t}_{h}_{o}_{u}_{g}_{h} _{w}_{e} _{h}_{a}_{v}_{e} _{d}_{e}_{v}_{i}_{s}_{e}_{d} _{a} bidding strategy that is _{o}_{p}_{t}_{i}_{m}_{u}_{m} _{i}_{n} _{t}_{h}_{e} _{f}_{a}_{c}_{e} _{o}_{f} the uncertainties involved we could
still face a bad outcome. We may not get the contract, and _{i}_{f} _{w}_{e} _{d}_{o} _{g}_{e}_{t} _{i}_{t}_{,} _{w}_{e} _{m}_{a}_{y} _{l}_{o}_{s}_{e} money. It is reasonable, there
_{f}_{o}_{r}_{e}_{,} _{t}_{h}_{a}_{t} if a _{p}_{e}_{r}_{f}_{e}_{c}_{t} clairvoyant appeared and offered to
eliminate one or both of the uncertainties in the problem,
we would be willing to offer him a financial consideration. _{T}_{h}_{e} _{q}_{u}_{e}_{s}_{t}_{i}_{o}_{n} _{i}_{s} _{h}_{o}_{w} _{l}_{a}_{r}_{g}_{e} _{s}_{h}_{o}_{u}_{l}_{d} this financial consider ation be.
We shall let C _{r}_{e}_{p}_{r}_{e}_{s}_{e}_{i}_{n}_{t} clairvoyance and _{C}_{,} represent
_{c}_{l}_{a}_{i}_{r}_{v}_{o}_{y}_{a}_{n}_{c}_{e} about a random variable x. Thus any proba _{b}_{i}_{l}_{i}_{t}_{y} _{a}_{s}_{s}_{i}_{g}_{n}_{m}_{e}_{n}_{t} _{c}_{o}_{n}_{d}_{i}_{t}_{i}_{o}_{n}_{a}_{l} on _{C}_{x} is conditional on the
fact that the value of x will be revealed to us. We define _{v}_{c}_{x} _{a}_{s} _{t}_{h}_{e} _{i}_{n}_{c}_{r}_{e}_{a}_{s}_{e} _{i}_{n} _{p}_{r}_{o}_{f}_{i}_{t} _{t}_{h}_{a}_{t} _{a}_{r}_{i}_{s}_{e}_{s} from obtaining
clairvoyance about x. It is clear that the
is _{j}_{u}_{s}_{t} the
_{t}_{h}_{a}_{t} _{w}_{e} shall
and the
_{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{p}_{r}_{o}_{f}_{i}_{t} _{t}_{h}_{a}_{t} _{w}_{e} _{w}_{o}_{u}_{l}_{d} _{o}_{b}_{t}_{a}_{i}_{n} without clairvoyance
Fig. 1. Priors on cost of comnpetitive
_{(}_{v}_{}_{b}_{E}_{)}_{=} 2(2b)(b2)= 
performance and lowest
bid.
_{+} 5 _{b} _{2}_{b}_{2} _{b} _{<}_{,}_{2}
_{F}_{i}_{g}_{.} _{2}_{.} _{E}_{x}_{p}_{e}_{c}_{t}_{e}_{d} profit as fuLnction of our bid.
distributions are shown in Fig. 1 along with the cumulative
_{a}_{n}_{d} _{c}_{o}_{m}_{p}_{l}_{e}_{m}_{e}_{n}_{t}_{a}_{r}_{y} _{c}_{u}_{m}_{u}_{l}_{a}_{t}_{i}_{v}_{e} distributions that _{t}_{h}_{e}_{y} _{i}_{m}_{p}_{l}_{y}_{.} _{F}_{r}_{o}_{m} _{t}_{h}_{e} _{s}_{y}_{m}_{m}_{e}_{t}_{r}_{y} of the _{d}_{e}_{n}_{s}_{i}_{t}_{y} functions we see
immediately that our expected cost
(p&8)
= _{p}_{,} is just 1/2
competitors _{(}_{t} 8)
and that the expected lowest bid of our
_{i}_{s} _{1}_{.} _{H}_{o}_{w}_{e}_{v}_{e}_{r}_{,} _{i}_{t} _{w}_{o}_{u}_{l}_{d} _{b}_{e} _{f}_{o}_{l}_{l}_{y} to assume that these ex
pected values will occur.
expected increase
x,(vcJ8)
(vlCx8)
(13)
in _{p}_{r}_{o}_{f}_{i}_{t} owing to clairvoyance about
difference between the expected profit
_{o}_{b}_{t}_{a}_{i}_{n} as a result of the clairvoyarnce
^{(}^{v} ^{8}^{)}^{;} ^{t}^{h}^{u}^{s}^{,}
(vcxlI) = (vJCX8)  (vI8).
_{W}_{e} _{c}_{a}_{n} _{n}_{o}_{w} _{r}_{e}_{t}_{u}_{r}_{n} _{t}_{o} _{(}_{8}_{)} and substitute these _{r}_{e}_{s}_{u}_{l}_{t}_{s}_{,}
_{(}_{v}_{l}_{b}_{&}_{)} = f5f(vbpfE){pI8}{p1;}
= _{f}_{}_{f}_{f}_{b}_{(}_{b}  _{p}_{)} {pl}{(18
=fp(b  P){PJ8}&Jf>b{Jf8}
 {t> b8}fp(b  p){pl}
= {t>b8}(b _{(}_{p}_{l}_{8}_{)}_{)}
 {t>b8}(bjP).
(10)
_{O}_{u}_{r} _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{p}_{r}_{o}_{f}_{i}_{t}_{,} _{g}_{i}_{v}_{e}_{n} that we bid _{b}_{,} is therefore the
_{p}_{r}_{o}_{d}_{u}_{c}_{t} _{o}_{f} the _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{t}_{y} that our competitor's lowest bid
_{w}_{i}_{l}_{l}_{e}_{x}_{c}_{e}_{e}_{d}_{o}_{u}_{r}_{s} _{a}_{n}_{d} the difference _{b}_{e}_{t}_{w}_{e}_{e}_{n} our _{b}_{i}_{d} _{a}_{n}_{d} our
_{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{c}_{o}_{s}_{t}_{.} From _{F}_{i}_{g}_{.} 1 we _{h}_{a}_{v}_{e} _{t}_{h}_{a}_{t} our expected
profit, given that we bid b, is simply
_{(}_{v}_{l}_{b}_{)}_{W}
(2 b)b2)
<
b <
2.
(11)
_{W}_{e} _{c}_{o}_{m}_{p}_{u}_{t}_{e} the _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{p}_{r}_{o}_{f}_{i}_{t} _{g}_{i}_{v}_{e}_{n} clairvoyance about
x,(v0Cx4), by
evaluating the expected profit given that
for _{e}_{a}_{c}_{h} possible value of x that the
_{m}_{i}_{g}_{h}_{t} _{r}_{e}_{v}_{e}_{a}_{l} and then summing this expecta
_{r}_{e}_{s}_{p}_{e}_{c}_{t} to the _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{t}_{y} assignment on x, _{x}_{I}_{8}_{1}_{,}
we know x,(vx8),
clairvoyant
tion with
_{(}_{V}_{I}_{C}_{x}_{,}_{)} = fX(vx&){x8}.
(14)
_{W}_{e} use the _{p}_{r}_{i}_{o}_{r} _{p}_{r}_{o}_{b}_{a}_{b}_{i}_{l}_{i}_{t}_{y} distribution { x _{8}_{1} for x in this calculation because _{u}_{p} to the moment that the clairvoyant
_{a}_{c}_{t}_{u}_{a}_{l}_{l}_{y} reveals the value of x the probability that we must _{a}_{s}_{s}_{i}_{g}_{n} to his statement about x is based only on our
_{p}_{r}_{i}_{o}_{r} knowledge 8.
_{B}_{y} _{u}_{s}_{i}_{n}_{g} _{(}_{1}_{3}_{)} _{a}_{n}_{d}_{(}_{1}_{4}_{)} we can assign the expected value
in monetary units of eliminating any uncertainty in the _{p}_{r}_{o}_{b}_{l}_{e}_{m}_{.} _{W}_{e} _{s}_{h}_{a}_{l}_{l} _{n}_{o}_{w} _{a}_{p}_{p}_{l}_{y} _{t}_{h}_{e}_{s}_{e} results to computing the value of _{e}_{l}_{i}_{m}_{i}_{n}_{a}_{t}_{i}_{n}_{g} the uncertainty in our cost and in the lowest competitive bid in the problem.
ANALYSIS OF CLAIRVOYANCE ABOUT OUR COST
_{F}_{i}_{g}_{u}_{r}_{e} 2 shows this expected profit as a function of our _{b}_{i}_{d}_{.} Note that a maximum _{p}_{r}_{o}_{f}_{i}_{t} of _{9}_{/}_{3}_{2} is achieved by _{m}_{a}_{k}_{i}_{n}_{g} the _{b}_{i}_{d} _{e}_{q}_{u}_{a}_{l} to _{5}_{/}_{4}_{.} Of course, the same result is obtained _{b}_{y} _{s}_{e}_{t}_{t}_{i}_{n}_{g} the derivative of (11), with respect to _{b}_{,} _{e}_{q}_{u}_{a}_{l} to _{z}_{e}_{r}_{o} and _{s}_{o}_{l}_{v}_{i}_{n}_{g} for b. Note that the expected
_{p}_{r}_{o}_{f}_{i}_{t} is _{p}_{o}_{s}_{i}_{t}_{i}_{v}_{e} for _{b}_{i}_{d}_{s} in _{t}_{h}_{e} range between 1/2 and 2,
_{W}_{e} now determine
Kvc,18),
the expected value to us of
about our cost _{p}_{.} From (13) and
eliminating uncertainty
^{(}^{1}^{4}^{)} ^{w}^{e} ^{w}^{r}^{i}^{t}^{e}
(vcpl&) = (vIC(8) (vI&)
(vIC")=f5(vIp8){pI8}
(15)
(16)
1966
HOWARD: INFORMATION VALUE THEORY
25
The expected profit
(vlpg)
that we would make if we knew
our cost is _{j}_{u}_{s}_{t} the _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{p}_{r}_{o}_{f}_{i}_{t} that we would make if
we bid b _{a}_{n}_{d} if _{o}_{u}_{r} _{c}_{o}_{s}_{t} _{w}_{a}_{s} _{p} maximized with _{r}_{e}_{s}_{p}_{e}_{c}_{t} to our bid _{b}_{;} _{t}_{h}_{a}_{t} _{i}_{s}_{,}
_{(}_{v}_{l}_{p}_{)} = Max (vbp&).
b
(17)
Using the assumptions of _{(}_{6}_{)} expansion _{c}_{o}_{n}_{c}_{e}_{p}_{t} to write
and _{(}_{7}_{)} we invoke the
(vl bp8) =f(vl bpf&)
{I
}
f{= b(b  p){f} = (b  p){C>bI&}
=
(b  p)
1
(2  b)
2
(18)
Note that if we take the _{e}_{x}_{p}_{e}_{c}_{t}_{a}_{t}_{i}_{o}_{n} of this _{e}_{q}_{u}_{a}_{t}_{i}_{o}_{n} with respect to the prior on p we immediately obtain _{(}_{1}_{1}_{)}_{.}
We determine our bid by maximizing (v bp&) with
respect to b. By setting its derivative with _{r}_{e}_{s}_{p}_{e}_{c}_{t} to b = 0
we find immediately that
dbKvbp&) = 02  b  (b  p) = 0, 2b = 2 + p.
b =
1 _{+}
2
(19)
The bid should be _{e}_{q}_{u}_{a}_{l} to 1 _{p}_{l}_{u}_{s} _{1}_{/}_{2} the value of our _{c}_{o}_{s}_{t}_{.} _{W}_{h}_{e}_{n} we insert this result in _{(}_{1}_{7}_{)} we find that the _{e}_{x}_{} pected profit _{g}_{i}_{v}_{e}_{n} that our cost is _{p} is
(VIp8)= Kv b = (1 + ) p) =
(

)
(20)
Now we compute the expected profit given clairvoyance
about p from (16),
~'/g\JO _{=}_{V}_{d}_{~}_{9}_{1}
(vCp8) = JIp\V/4JjPlE} _{} _{"}_{o}_{l}_{d}
_{}_{2}_{\}
_{P}_{'} _{2}
 _{2}_{/}
_{7} _28
_{2}_{4}
_{9}_{6}_{'}
(21)
This _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{p}_{r}_{o}_{f}_{i}_{t} is _{2}_{8}_{/}_{9}_{6}_{,} _{1}_{/}_{9}_{6} more than we obtained
in (12) in the case of no clairvoyance. _{T}_{h}_{e}_{r}_{e}_{f}_{o}_{r}_{e}_{,} _{f}_{o}_{l}_{l}_{o}_{w}_{i}_{n}_{g}
_{(}_{1}_{5}_{)} we have found
_{(}_{K}_{V}_{C}_{P}_{8}_{)} = _{(}_{V}_{I}_{C}_{P}_{8}_{)}  (vl8)=96=96 = _{9}_{6}_{}
_{(}_{2}_{2}_{)}
The _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} _{i}_{n}_{c}_{r}_{e}_{a}_{s}_{e} in our _{p}_{r}_{o}_{f}_{i}_{t} that will result from
_{h}_{a}_{v}_{i}_{n}_{g} our _{c}_{o}_{s}_{t} _{r}_{e}_{v}_{e}_{a}_{l}_{e}_{d} _{t}_{o} us _{b}_{y} a _{c}_{l}_{a}_{i}_{r}_{v}_{o}_{y}_{a}_{n}_{t} is conse
quently _{1}_{/}_{9}_{6}_{.}
_{I}_{f} _{t}_{h}_{e} _{v}_{a}_{l}_{u}_{e} of _{t}_{h}_{i}_{s} _{a}_{n}_{a}_{l}_{y}_{s}_{i}_{s} _{d}_{e}_{p}_{e}_{n}_{d}_{e}_{d} on the actual
_{e}_{x}_{i}_{s}_{t}_{e}_{n}_{c}_{e} of _{c}_{l}_{a}_{i}_{r}_{v}_{o}_{y}_{a}_{n}_{c}_{e} _{t}_{h}_{e}_{n} it would have _{o}_{n}_{l}_{y} theo
retical interest. However, since clairvoyance _{r}_{e}_{p}_{r}_{e}_{s}_{e}_{n}_{t}_{s} _{c}_{o}_{m}_{p}_{l}_{e}_{t}_{e} _{e}_{l}_{i}_{m}_{i}_{n}_{a}_{t}_{i}_{o}_{n} of the _{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y} about a random variable it follows that what we would _{p}_{a}_{y} for _{c}_{l}_{a}_{i}_{r}_{v}_{o}_{y}_{a}_{n}_{c}_{e}
should be an upper bound on any experimental _{p}_{r}_{o}_{g}_{r}_{a}_{m}
that _{p}_{u}_{r}_{p}_{o}_{r}_{t}_{s} to aid us in _{e}_{l}_{i}_{m}_{i}_{n}_{a}_{t}_{i}_{n}_{g} _{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y} about
that variable. _{T}_{h}_{u}_{s}_{,} in _{t}_{h}_{e} _{p}_{r}_{e}_{s}_{e}_{n}_{t} _{p}_{r}_{o}_{b}_{l}_{e}_{m} _{t}_{h}_{e} _{c}_{o}_{m}_{p}_{a}_{n}_{y}
should not hire any cost accounting or production _{e}_{x}_{p}_{e}_{r}_{t}_{s}
to aid in _{e}_{l}_{i}_{m}_{i}_{n}_{a}_{t}_{i}_{n}_{g} _{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y} about _{p} unless _{t}_{h}_{e} cost
of these services is considerably below of clairvoyance plays the same role in
The concept
(vc,j,8).
analyzinig decision
problems that the _{c}_{o}_{n}_{c}_{e}_{p}_{t} of a Carnot _{e}_{n}_{g}_{i}_{n}_{e} _{p}_{l}_{a}_{y}_{s} in
analyzing thermodynamic problems. These theoretical constructs provide bench marks _{a}_{g}_{a}_{i}_{n}_{s}_{t} which _{p}_{r}_{a}_{c}_{t}_{i}_{c}_{a}_{l} realizations can be tested.
ANALYSIS OF CLAIRVOYANCE _{A}_{B}_{O}_{U}_{T} THE _{L}_{O}_{W}_{E}_{S}_{T} COMPETITIVE BID Now we determine what it is worth to know the lowest
competitive bid. We write immediately,
_{(}_{V}_{c}_{t}_{l}_{F}_{)} = (vCQ8)  (v 8)
(v ICQ,) = ftIe(vt8ieII8}
and
(vlf&) = Mlax (v bf8).
(23)
(24)
(25)
We can perform _{e}_{x}_{p}_{a}_{n}_{s}_{i}_{o}_{n} in terms of our cost _{p} _{j}_{u}_{s}_{t} as we did in (18) in terms of L. We write,
(v bt) = f(vlbpe8){pl8}.
From (9) we have immediately that
(26)
vb&) _{=}
(vbf8=
fv(b  p){pl8} = b p
0
if if b b < _{t}
> f.
(27)
Therefore if t _{<} p do not _{b}_{i}_{d}_{;} if t _{>} p _{b}_{i}_{d} _{t}_{}_{,} _{j}_{u}_{s}_{t} _{b}_{e}_{l}_{o}_{w} _{t}_{'}_{.} It is easy to see _{w}_{h}_{y} this is the best bid. Since we _{k}_{n}_{o}_{w} the lowest _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{v}_{e} bid _{t} we can _{g}_{e}_{t} the _{c}_{o}_{n}_{t}_{r}_{a}_{c}_{t} _{b}_{y} bidding just under t. However, if t is _{a}_{l}_{r}_{e}_{a}_{d}_{y} less than _{o}_{u}_{r}
_{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} cost then we would _{e}_{x}_{p}_{e}_{c}_{t} _{t}_{o} _{l}_{o}_{s}_{e} _{m}_{o}_{n}_{e}_{y} _{b}_{y} _{s}_{u}_{c}_{h}
a strategy for it would be better _{n}_{o}_{l}_{t} _{t}_{o} _{g}_{e}_{t} _{t}_{h}_{e} _{c}_{o}_{n}_{t}_{r}_{a}_{c}_{t}
at all. Consequently, if t is less thani our _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} cost _{p}
we should not _{b}_{i}_{d}_{;} while if _{t} is _{g}_{r}_{e}_{a}_{t}_{e}_{r} _{t}_{h}_{a}_{n} _{p} _{w}_{e} should bid _{j}_{u}_{s}_{t} _{b}_{e}_{l}_{o}_{w} f. Therefore _{w}_{e} _{h}_{a}_{v}_{e}
vtg) = Alax (vlbt8) =
P
f
i
f
<> p
(28)
The
(vjt8),
expected profit given the lowest _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{v}_{e} bid _{(}_{,} is plotted as a function of t in _{F}_{i}_{g}_{.} 3. To find the
(vjCt8),
we
func
expected profit given clairvoyance about _{X}_{,}
integrate this function with _{r}_{e}_{s}_{p}_{e}_{c}_{t} _{t}_{o} the _{t} _{d}_{e}_{n}_{s}_{i}_{t}_{y} tion of _{F}_{i}_{g}_{.} 1 and obtain
(vQ8) = ff4(vt8){C8} ~~V
^{I}
Ct8) = ^{f}
f1%2dl (t
~~~~54
2).2 = 16 = 96
(29)
The expected profit given clairvoyance about t is _{5}_{4}_{/}_{9}_{6}_{,}
twice as large as the expected profit of _{2}_{7}_{/}_{9}_{6} obtained in
_{(}_{1}_{2}_{)} where no _{c}_{l}_{a}_{i}_{r}_{v}_{o}_{y}_{a}_{n}_{c}_{e} was available. The _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d}
26
IEEE TRANSACTIONS ON SYSTEMS SCIENCE AND CYBERNETICS
AUGUST
(xtKI )
X p
A~~~~
Fig. 3. Our expected profit as function of
lowest competitive bid.
increase in profit with clairvoyance about t is, therefore,
_{(}_{v}_{c}_{f}_{t}_{8}_{E} = (v Cf)  _{(}_{v}_{1}_{)} = 96  96 = 9
54
_{2}_{7}
27
(30)
By comparing (30) and (22) we see that the _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} increase in profit because of clairvoyance about the lowest _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{v}_{e} bid _{t} is _{2}_{7} times as _{g}_{r}_{e}_{a}_{t} as the _{e}_{x}_{p}_{e}_{c}_{t}_{e}_{d} in
crease in profit because of clairvoyance about our cost _{p}_{.} Yet the density functions for p and t shown in Fig. 1 reveal that the range of uncertainty in t is only twice the
range of uncertainty in p. Why, therefore, is information
_{a}_{b}_{o}_{u}_{t} _{t}_{h}_{e} _{l}_{o}_{w}_{e}_{s}_{t} _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{v}_{e} bid so much more valuable _{t}_{h}_{a}_{n} _{i}_{n}_{f}_{o}_{r}_{m}_{a}_{t}_{i}_{o}_{n} about our cost? The _{e}_{x}_{p}_{l}_{a}_{n}_{a}_{t}_{i}_{o}_{n} is that _{w}_{e} _{c}_{a}_{n} _{u}_{s}_{e} information about _{t} far more _{e}_{f}_{f}_{e}_{c}_{t}_{i}_{v}_{e}_{l}_{y} in
controlling the profitability of the situation than we can
_{u}_{s}_{e} information about our costs. If we know _{t} then we _{c}_{a}_{n} _{c}_{o}_{n}_{t}_{r}_{o}_{l} _{i}_{m}_{m}_{e}_{d}_{i}_{a}_{t}_{e}_{l}_{y} whether or not we _{g}_{e}_{t} the con
tract, although we may still lose money even if we get it. Knowing p prevents us from bidding on any contract that
would be unprofitable for us if we got it but is no help in determining whether or not we will get it.
_{A}_{N}_{A}_{L}_{Y}_{S}_{I}_{S} _{O}_{F} CLAIRVOYANCE ABOUT OUR COSTS AND THE _{L}_{O}_{W}_{E}_{S}_{T} COMPETITIVE BID
Suppose that we are now offered clairvoyance about our
_{c}_{o}_{s}_{t} _{p} _{a}_{n}_{d} _{t}_{h}_{e} _{l}_{o}_{w}_{e}_{s}_{t} _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{v}_{e} bid f. _{W}_{h}_{a}_{t} would this
represent the
_{a}_{b}_{o}_{u}_{t} both _{p} and
_{4}_{.} _{T}_{h}_{e}_{n} _{i}_{n} _{d}_{i}_{r}_{e}_{c}_{t} _{a}_{n}_{a}_{l}_{o}_{g}_{y} with our earlier results for clair
_{v}_{o}_{y}_{a}_{n}_{c}_{e} _{a}_{b}_{o}_{u}_{t} a _{s}_{i}_{n}_{g}_{l}_{e} random variable we can write
_{j}_{o}_{i}_{n}_{t} _{i}_{n}_{f}_{o}_{r}_{m}_{a}_{t}_{i}_{o}_{n} be worth? We let increase in profit because of clairvoyance
vcpf
(vcpflj) = (viCv8)  (V18)
_{(}_{v}_{I}_{G}_{A}_{e}_{)} = fp,K(VPf8){P,CJg}
(31)
(32)
and
(vpf&) = Max (v bpte)
b
{b 
(vJpf,)
(vbpfE) = {O
_{p}
if b _{<}
t
if b > f.
_{(}_{3}_{3}_{)}
Therefore, if t < p, do not bid; if t > p, bid f. Since
both our _{c}_{o}_{s}_{t} _{p} and the lowest _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{v}_{e}
can _{g}_{e}_{t} the contract _{b}_{y} _{b}_{i}_{d}_{d}_{i}_{n}_{g} _{s}_{l}_{i}_{g}_{h}_{t}_{l}_{y} less
bid f we
we know
than t and we want it if this bid exceeds our cost _{p}_{.}
Consequently, our expected profit givein p and t will be
_{t}_{} _{p} if _{t} exceeds _{p} because we shall bid _{j}_{u}_{s}_{t} less than ton
the contract and get it. The expected profit will be zero if t is less than p because we shall not bid, e.g.,
°
\VIP/(0
)
P
i
If C> p
if
(<
_{P}_{.}
(34)
Now we substitute the results of (34) and (7) to _{o}_{b}_{t}_{a}_{i}_{n}
(V _{C}_{p}_{A}_{)} = fP5f(VIPr8f){Pg}{tg}
fodp
I=pdl{8 _{I}_{(}_{t}_{}_{p}_{)}
=
1fodpfpdf(t  p) = ^{7} = 56
2
12
_{9}_{6}
(35)
The expected profit given clairvoyance about both p and _{t} is therefore 56/96, the highest expected profit we _{h}_{a}_{v}_{e}
seen thus far. The expected increase in profit resulting from clairvoyance about p and 4is, therefore
(Vcpfl) =
KvCP,4~~~)
(Vjcpte)  (v18) = 56
96
96 =96~ (36)


27
29
The expected value 29/96 of knowing p and _{t} jointly is, therefore, greater than the sum of the 1/96 value of know ing p alone and the 27/96 value of knowing _{t} alone. The
further advantage provided by the joint knowledge of _{p} and _{f} is illustrated by the fact that now the company can never lose money whereas in each of the two earlier _{c}_{a}_{s}_{e}_{s} it could. However, the most striking result of our analysis is the
way in which the uncertainty about the lowest competitive
bid towers over the uncertainty in our company's cost as a concerni of management. In this problem it is worth far
more to know what the _{c}_{o}_{m}_{p}_{e}_{t}_{i}_{t}_{i}_{o}_{n} _{i}_{s} _{d}_{o}_{i}_{n}_{g} than it _{i}_{s} the internal performance of our own company. You might _{s}_{a}_{y} _{f}_{a}_{c}_{e}_{t}_{i}_{o}_{u}_{s}_{l}_{y} that we have demonstrated the _{d}_{o}_{l}_{l}_{a}_{r}_{s} and
cents payoff in industrial espionage.
CONCLUSION
The observations made in this paper have wide _{a}_{p}_{}
plication. We can treat the case where our clairvoyance
is imperfect rather than perfect. The imperfection _{c}_{a}_{n} be
because of a statistical effect arising in nature or the result of incompetence or mendacity or both in the source of the information. Placing a value on the reduction of _{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y} is the first step in experimental design, for only when we _{k}_{n}_{o}_{w} what it is worth to reduce _{u}_{n}_{c}_{e}_{r}_{t}_{a}_{i}_{n}_{t}_{y} do we have a basis for allocating our resources in experimentation _{d}_{e}_{s}_{i}_{g}_{n}_{e}_{d} to
reduce the uncertainty. These remarks are as applicable to the establishment of a research _{l}_{a}_{b}_{o}_{r}_{a}_{t}_{o}_{r}_{y} as _{t}_{h}_{e}_{y} are to the testing of light bulbs.
If information value _{t}_{h}_{e}_{o}_{r}_{y} and associated decision
theoretic _{s}_{t}_{r}_{u}_{c}_{t}_{u}_{r}_{e}_{s} do not in the future _{o}_{c}_{c}_{u}_{p}_{y} a _{l}_{a}_{r}_{g}_{e}
_{p}_{a}_{r}_{t} of the education of _{e}_{n}_{g}_{i}_{n}_{e}_{e}_{r}_{s}_{,} then the _{e}_{n}_{g}_{i}_{n}_{e}_{e}_{r}_{i}_{n}_{g} _{p}_{r}_{o}_{f}_{e}_{s}_{s}_{i}_{o}_{n} will find that its traditional role of _{m}_{a}_{n}_{a}_{g}_{i}_{n}_{g}
scientific andi economic _{r}_{e}_{s}_{o}_{u}_{r}_{c}_{e}_{s} for the benefit of man
has been forfeited to another _{p}_{r}_{o}_{f}_{e}_{s}_{s}_{i}_{o}_{n}_{.}
REFERENCES
_{[}_{1}_{]} _{R}_{.} A. _{H}_{o}_{w}_{a}_{r}_{d}_{,} _{"}_{B}_{a}_{y}_{e}_{s}_{i}_{a}_{n} decision models for _{s}_{y}_{s}_{t}_{e}_{m} _{e}_{n}_{g}_{i}_{n}_{e}_{e}_{r}_{}
[2]
ing," IEEE Trans. on Systems Science and Cybernetics, vol. _{S}_{S}_{C}_{}_{1}_{,}
pp. 3640,
November 1965.
"Dynamic inference," J.
Operations Research, vol. 13, pp.
712733, SeptemberOctober 1965.
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