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Unit 10 Decision Analysis - Basics_1

Unit 10 Decision Analysis - Basics_1 - Unit 10 Decision...

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10-1 Copyright © 1999-2010 by R. E. Wendell. Unit 10 Decision Analysis - Basics

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10-2 Copyright © 1999-2010 by R. E. Wendell. Relation to Ragsdale As in Ragsdale we will use TreePlan as the supporting software for decision analysis. This software is an EXCEL add-in and can be found on the CD in Ragsdale. See pages 742-750 for how-to-use instructions. Example 1 is similar to the Magnolia Inns problem-- see pp 725-728. Examples 2, 3 and 4 are similar to the OSHA problem on pp 750-760 in that they are all multistage problems.
10-3 Copyright © 1999-2010 by R. E. Wendell. Single-Stage versus Multiple-Stage Decisions Single stage decision Many practical decisions have multiple stages Decision Analysis is particularly useful for multi-stage decisions Model Decision Alternatives Info. about Uncertainty Uncertainty resolves Terminal Payoff Stage 1 Model Decision 1 Alternatives Info. about Uncertainty Stage 2 Model Decision 2 Alternatives Info about Uncertainty Uncertainty resolves

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10-4 Copyright © 1999-2010 by R. E. Wendell. Ex 1: Premium Audio with Probabilities Suppose probabilities are: State of Nature Probability Recessionary Economy 0.2 Neutral Economy 0.4 Growth Economy 0.4
10-5 Copyright © 1999-2010 by R. E. Wendell. Decision Tree Terminal Values Low Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 Medium High Decision Node (Rectangle) Chance Node (Circle) \$ 50,000 \$ 120,000 \$ 80,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 \$ 200,000 \$ 140,000 \$ 20,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 \$ 220,000 \$ 120,000 \$ -40,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 \$ 75,000 \$ 75,000 \$ 75,000 Exit Market

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10-6 Copyright © 1999-2010 by R. E. Wendell. Interpreting the Schematic - decision node whose branches denote decision choices - chance node where branches denote uncertain events Tree - denoted possible paths of decision nodes and chance nodes Terminal value - denotes a measure of the payoff of the decisions and outcomes along a path
10-7 Copyright © 1999-2010 by R. E. Wendell. Decision Tree (with Expected Profits) Terminal Values Low Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 Medium High Decision Node (Rectangle) Chance Node (Circle) \$ 50,000 \$ 120,000 \$ 80,000 \$ 140,000 \$ 128,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 \$ 200,000 \$ 140,000 \$ 20,000 \$ 90,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 \$ 220,000 \$ 120,000 \$ -40,000 Recessionary Prob = 0.2 Neutral Prob = 0.4 Growth Prob = 0.4 \$ 75,000 \$ 75,000 \$ 75,000 Exit Market \$ 75,000 140,000

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