The Value of Title Insurance While Buying a House
* A Scenario:
- Price of house is $200,000
- 5% chance that seller does not own house
* Risk neutral buyer would pay:
Risk averse buyer would pay quite less
* By reducing the risk factor, title insurance increases the value of house by an amount much greater than premium.
* Value of Complete Information
- The difference between expected value of choice with complete information and expected value when information is incomplete.
* Assume that a store manager must decide how many fall suits to order:
- 100 suits cost $180 per suit
- 50 suits cost $200per suit
- The price of suits is $300
* Assume that a store manager must determine how many fall suits to order:
- Unsold suits can be returned for ½ cost.
- The probability of selling each quantity is 50 percent.
With the incomplete information:
- Risk Neutral: Buy 100 suits
- Risk Averse: Buy 50 suits
* The expected value with the complete information is $8,500.
- 8,500 = .5(5,000) + .5(12,000)
* The expected value with the uncertainty is $6,750.
The value of complete information is $1,750.
* An Example
- Per capita packed milk consumption over years has fallen
- The milk producers which is engaged in market research to develop new sales strategies to encourage consumption of packed milk.
- Packed milk demand is seasonal with greatest demand in summer
- Ep is negative and small
- EI is positive and large
* Milk advertising increases sales most in summer.
* Allocating advertising based on this information in Karachi increased sales by Rs. 400,000 and profits by 9 percent.
* The cost of the information was low relatively, while value was substantial.