Decision tree example problem
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This document presents an example decision problem to demonstrate decision tree analysis. It describes three potential decisions - expand, maintain status quo, or sell now - under two possible future states, good or poor foreign competitive conditions. It then outlines the steps to analyze the problem: 1) determine the best decision without probabilities using various criteria, 2) determine the best decision with probabilities using expected value and opportunity loss, 3) compute the expected value of perfect information, and 4) develop a decision tree showing expected values at each node.
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Decision tree example problem
- 1. Decision Tree Example Problem PRESENTED BY:- SATYABRATA PRADHAN BY:- KRUPAJAL BUSINESS SCHOOL REGD. NO.-11KB009 NO.-11KB009 BATCH.NO:-2011-13 SATYABRATA PRADHAN
- 2. Decision Analysis Example Problem States of Nature Good Foreign Poor Foreign Competitive Decision Competitive Conditions Conditions Expand $ 800,000 $ 500,000 Maintain Status Quo 1,300,000 -150,000 Sell now 320,000 320,000 2
- 3. Decision Analysis Example Problem a. Determine the best decision without probabilities using maximax, maximin, and minimax regret b. Determine best decision with probabilities assuming .70 probability of good conditions, .30 of poor conditions. Use expected value and expected opportunity loss criteria. c. Compute expected value of perfect information. d. Develop a decision tree with expected value at the nodes. 3
- 4. Decision Analysis Example Problem Determine decisions without probabilities. Maximax Decision: Maintain status quo Decisions Maximum Payoffs Expand $800,000 Status quo 1,300,000 (maximum) Sell 320,000 Maximin Decision: Expand Decisions Minimum Payoffs Expand $500,000 (maximum) Status quo -150,000 Sell 320,000 4
- 5. Decision Analysis Example Problem Minimax Regret Decision: Expand Decisions Maximum Regrets Expand $500,000 (minimum) Status quo 650,000 Sell 980,000 5
- 6. Decision Analysis Example Problem Determine Decisions with EV. Expected value decision: Maintain status quo Expand $800,000(.7) + 500,000(.3) = $710,000 Status quo $1,300,000(.7) - 150,000(.3) = $865,000 Sell $320,000(.7) + 320,000(.3) = $320,000 6
- 7. Decision Analysis Example Problem Solution Compute EVPI. EV given perfect information = 1,300,000(.7) + 500,000(.3) = $1,060,000 EV without perfect information = $1,300,000(.7) - 150,000(.3) = $865,000 EVPI = $1.060,000 - 865,000 = $195,000 7
- 8. Decision Analysis Example Problem Develop a decision tree. 8
- 9. THANK YOU…