Expected Value of Perfect Information (EVPI) is calculated as the difference between

Expected Value Under Uncertainty (EVUU) and Expected Value using a Perfect
Prediction (EVPP). It is the value of having perfect information without any
uncertainty. For any payoff table which has probabilities associated with each state
of nature the following steps are used for the purpose of calculating the Expected
Value of Perfect Information (EVPI).
First the Expected Monetary Value (EMV) is calculated for each alternative decision
or action. The expected monetary value for an alternative course of action is
calculated by adding the product of payoffs associated with each state of nature
and their respective probabilities. In case of a decision criterion like maximin the
EMV for each alternative course of action will be the minimum value for that course
of action.
Once the EMV is calculated for each alternative course of action EVUU needs to be
ascertained from the EMVs calculated. In case the probabilities for the states of
nature are given with no specific decision criterion the EVUU is taken to be the
maximum of the EMVs calculated. In case of decision criterion like maximin the
maximum of the minimum values (EMVs) is taken to be the EVUU.
Next the EVPP needs to be calculated. For the purpose of calculating EVPP first the
maximum value for each state of nature is identified. Then the values for each state
of nature are multiplied with their respective probabilities. In case the probabilities
for the states of nature are not given each state of nature is considered to be
equally likely. The product of the maximum payoffs and probabilities are then added
up to obtain EVPP.
Finally the EVPI is calculated by subtracting EVUU from EVPP. Thus
EVPI = EVPP EVUU
The above process can be explained with the help of an example
Given the payoff table
Weather
Decision
Good
Bad
Lease Land
$90,000
-$40,000

Buy Saving Certificate

$10,000
$10,000
In the above table the decision of whether to take the land on lease or to buy the
saving certificate are the two alternative courses of action. The good and bad
weather conditions are the two states of nature. Given the decision making criterion
the EMVs, EVUU and EVPI can be ascertained as follows.
Maximax
The maximax criterion represents the optimistic attitude of the decision maker
where the decision maker selects the largest payoff in the payoff table and thus the
action associated with it.

Weather

Decision
Good
Bad
Row maximum
Lease Land
$90,000
-$40,000
$90,000
Buy Saving Certificate
$10,000
$10,000
$10,000
Column maximum
$90,000

$10.000
EMVs
Lease land = $90,000
Buy saving certificate = $10,000
EVUU
EVUU is the maximum of the EMVs
EVUU = $90,000
EVPP
EVPP can be calculated by multiplying the maximum payoff for each state of nature
(column maximum) by the respective probability of the state of nature. Since the
events are equally likely the probability for each of the two states of nature is taken
to be 0.5.
EVPP = $90,000 * 0.5 + $10,000 * 0.5
EVPP = $50,000
EVPI
EVPI = EVPP EVUU
EVPI = $50,000 - $90,000
EVPI = -$40,000
Maximin
The maximin criterion represents the pessimistic attitude of the decision maker
where the decision maker selects the largest of the worst payoffs in the payoff table
and thus the action associated with it.

Weather

Decision
Good
Bad

Row minimum
Lease Land
$90,000
-$40,000
-$40,000
Buy Saving Certificate
$10,000
$10,000
$10,000
Column maximum
$90,000
$10.000
EMVs
Lease land = -$40,000
Buy saving certificate = $10,000
EVUU
EVUU is the maximum of the EMVs
EVUU = $10,000
EVPP
EVPP can be calculated by multiplying the maximum payoff for each state of nature
(column maximum) by the respective probability of the state of nature. Since the
events are equally likely the probability for each of the two states of nature is taken
to be 0.5.
EVPP = $90,000 * 0.5 + $10,000 * 0.5
EVPP = $50,000
EVPI
EVPI = EVPP EVUU

EVPI = $50,000 - $10,000

EVPI = $40,000