Quamet2 Lesson 3.1
Quamet2 Lesson 3.1
Lesson 3.1
Decision Trees
Any problem that can be presented in a decision table can also be graphically represented in a decision tree Decision trees are most beneficial when a sequence of decisions must be made All decision trees contain decision points or nodes and state-of-nature points or nodes
A decision node from which one of several alternatives may be chosen A state-of-nature node out of which one state of nature will occur
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Trees start from left to right Represent decisions and outcomes in sequential order Squares represent decision nodes Circles represent states of nature nodes Lines or branches connect the decisions nodes and the states of nature
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A Decision Node
t uc ant tr l ns e P Co arg L
Unfavorable Market
Favorable Market
Unfavorable Market
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= (0.5)($200,000) + (0.5)($180,000)
Payoffs Favorable Market (0.5) $200,000
$180,000
$100,000 $20,000
= (0.5)($100,000) + (0.5)($20,000)
$0
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Alfred is the Product Manager of Tide and he is planning to launch a new product. He can either launch Tide with Zonrox, Tide with Downy, or not do anything at all. He was able to determine the expected payoff depending on the decision and the type of the market, successful or a failure. The probability is 60% that the market is successful and 40% that the market is a failure. The figures are summarized in the following table. What should Alfred launch? How much gain or loss does he expect for the company?
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ith w de rox Ti on Z
$18,000
$12,000 $3,000
$0
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When sequential decisions need to be made, decision trees are more powerful tools than decision tables. Suppose that before deciding about building a new plant, John has the option of conducting his own marketing survey, at a cost of $10,000. (This cost are subtracted from payoffs.) There is a 45% chance that the survey results will indicate a favorable market and 55% chance the results will be negative. Conditional probabilities of market types depending on survey results are calculated. This will be shown in next lesson.
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Payoffs Favorable Market (0.78) Unfavorable Market (0.22) Favorable Market (0.78) Unfavorable Market (0.22) No Plant Favorable Market (0.27) Unfavorable Market (0.73) Favorable Market (0.27) Unfavorable Market (0.73) No Plant $190,000 $190,000 $90,000 $30,000 $10,000 $190,000 $190,000 $90,000 $30,000 $10,000
2 3
M ar ke t
ve y
Su r
4 5
Co
nd uc t
Do
No t
Co n duc t Su rve y
6 7
Favorable Market (0.50) Unfavorable Market (0.50) Favorable Market (0.50) Unfavorable Market (0.50) No Plant
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$49,200 C
on du ct
$2,400
M ar ke t
Su r
ve y
$106,400
Do
$10,000
No t
Favorable Market (0.50) Unfavorable Market (0.50) Favorable Market (0.50) Unfavorable Market (0.50) No Plant
$40,000
Co n duc t Su rve y
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= (EV with sample information + cost) (EV without sample information) EVSI = ($49,200 + $10,000) $40,000 = $19,200
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This means that Thompson Lumber Company could have paid up to $19,200 for a market study and still come out ahead. Since it costs $10,000, the survey is indeed worthwhile.
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