ma23 - I n tegrating Expected Moneta ry Values into D...

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Unformatted text preview: I n tegrating Expected Moneta ry Values into D ecision T rees When probabili ties can be assigned to certain states of nature and potential payoffs are known, this i nformation can be integrated into decision t rees This can help the decision-maker use the decision t ree to choose the best alternative. These are especially useful w hen there is more than one decision to be made. The following are the steps involved integrating expected monetary values into decision t rees: 1. 2. 3. 4. 5. Define the problem Draw the decision t ree Assign probabilities to each state of nature Estimate the payoffs for each decision a lternative under each state of nature Work backward (from r ight to left) and compute the expected monetary value for each state-of-nature node. Mo re Complex Decision T ree P roblems Thus far, we have considered a relatively simple decision t ree with one decision and two states of nature. Decision t rees are most useful when the decision maker faces a sequence of multiple decisions. Ethics in Decision-M a k ing So far, we have discussed decisions and decision t rees i n terms of maximizing payoffs, or profits, for the organization. However, legal and ethical considerations can also be integrated into decision t rees. In the end, organizations want to maximize shareholder value while acting ethically. The company w ill never do anything that is illegal or unethical. I t w ill only take an action that does not maximize returns if it would be unethical not to take the action. ...
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This note was uploaded on 02/03/2011 for the course MAN 4504 taught by Professor Benson during the Spring '08 term at University of Florida.

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ma23 - I n tegrating Expected Moneta ry Values into D...

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