IEMS 326 Notes08DecisionTrees

IEMS 326 Notes08DecisionTrees - Decision Trees IEMS 326...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Decision Trees IEMS 326 Lecture 8
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Decision Trees Consider a small number of possible events. similar to scenario analysis Evaluate expected cashflow or NPV What would we do when we have choices? Models managerial flexibility Make the decision that maximizes NPV. Evaluation: Backward recursion computes NPVs at each node. Effect: pick the decision policy yielding the highest (expected) NPV.
Background image of page 2
Conceptual: Enumeration Want to pick the decision policy yielding the highest (expected) NPV. Find cashflows for this decision policy d in each scenario i (which has probability p i ). Compute NPV V i (d) of d’s cashflows in each scenario i. Expected NPV of decision policy d is p 1 V 1 (d) + … + p n V n (d). Conceptually simpler, may take longer.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
How To: Backward Recursion Construct a tree, left to right, with branches . Some branches end in leaves ; leaves terminate. Some branches end in
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7

IEMS 326 Notes08DecisionTrees - Decision Trees IEMS 326...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online