An Application of Statistical Decision Theory to Commercial Turkey Production

Abstract

This article provides an empirical application of Bayesian decision theory to management decisions under uncertainty. The empirical problem is one of choice between contract and independent production of turkeys. The major random variables affecting incomes are product prices and mortality rates. The optimal action is first determined where only prior probabilities of the states of nature are available. Optimal strategies are then determined where a price‐forecasting model is available and posterior probabilities of the states are determined. The value of the additional information provided by the price‐forecasting model is substantial. Simulated growth in firm net worth is faster and more stable when the price‐forecasting model is used.