Managerial decision making – case study 6

 One of the principles that arise from a decision-analysis approach to valuing information is that information is worthless if no possible informational outcome will change the decision. For example, suppose that you are considering whether to make a particular investment. You are tempted to hire a consultant recommended by your Uncle Jake (who just went bankrupt last year) to help you analyze the decision. If, however, you think carefully about the things that the consultant might say and conclude that you would (or would not) make the investment regardless of the consultant’s recommendation, then you should not hire the consultant. This principle makes perfectly good sense in the light of our approach; do not pay for information that cannot possibly change your mind. In medicine, however, it is standard practice for physicians to order extensive batteries of tests for patients. Although different kinds of patients may be subjected to different overall sets of tests, it is nevertheless the case that many of these tests provide information that is worthless in a decision analysis sense; the doctor’s prescription would be the same regardless of the outcome of a particular test. 

 Questions
1. As a patient, would you be willing to pay for such tests? Why or why not? 

 2. What incentives do you think the doctor might have for ordering such tests, assuming he realizes that his prescription would not change? 

 3. How do his incentives compare to yours? 

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