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Tools For Financial Decision Making: Decision Trees: Session 6

This document discusses using decision trees and the SilverDecisions software to help J.K. Rowling decide whether to sign exclusive rights to her new Harry Potter book with a movie company or TV network. It provides the payouts and probabilities for small, medium, and large box office returns if she signs with the movie company, and a flat payout if she signs with the TV network. It instructs using SilverDecisions to calculate the expected return, maximax, and maximin strategies to help determine Rowling's optimal decision.

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Krutarth Patel
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52 views8 pages

Tools For Financial Decision Making: Decision Trees: Session 6

This document discusses using decision trees and the SilverDecisions software to help J.K. Rowling decide whether to sign exclusive rights to her new Harry Potter book with a movie company or TV network. It provides the payouts and probabilities for small, medium, and large box office returns if she signs with the movie company, and a flat payout if she signs with the TV network. It instructs using SilverDecisions to calculate the expected return, maximax, and maximin strategies to help determine Rowling's optimal decision.

Uploaded by

Krutarth Patel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Tools for Financial Decision

Making: Decision Trees


Session 6
Software to use
• SilverDecisions
• Tutorial Link given below: We will use this
video today
– http://silverdecisions.pl/
• P.N. all costs will be negative pay-offs
Click on Run
Advantages:
No need to download
Easy to use
Example Decision Tree

Chance Terminal
node node
Decision 1
ion
node Decis
Dec
is ion 2
Problem: J.K.Rowling

J.K. Rowling has written a new book in the Harry


Potter Series. A movie company and a TV network
both want exclusive rights to this new book. If she
signs with the network, she will receive a single lump
sum, but if she signs with the movie company, the
amount she will receive depends on the market
response to her movie. What should she do?
Payouts and Probabilities
• Movie company Payouts
– Small box office - $200,000
– Medium box office - $1,000,000
– Large box office - $3,000,000
• TV Network Payout
– Flat rate - $900,000
• Probabilities
– P(Small Box Office) = 0.3
– P(Medium Box Office) = 0.6
– P(Large Box Office) = 0.1
Use SilverDecisions to help Ms
Rowling decide what to do
• What would be J.K.Rowling’s decision
based on:
– Expected Return?
– Maximax?
– Maximin?
Homework
• Think about the risk profiles of people
choosing expected returns, maximax and
maximin

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