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Topic 4: Decision Tree Analysis - Coggle Diagram
Topic 4: Decision Tree Analysis
Introduction
Decision Theory
is
an analytic
and
systematic approach
to the
study of decision making
Good decision
is
one that is based on logic
,
considers all available data
and
possible alternatives
, and the
quantitative approach described here
What is
involved
in
making a good decision
?
5 Steps in Decision Making
Define the problem
Thompson Lumber Company is
considering expanding by manufacturing and marketing a new product
–
backyard storage sheds.
The company can choose to:
Construct a large new plant.
Construct a small new plant.
Do not develop the new product line at all.
The
possible outcomes (states of nature)
are:
The market could be
favorable
or
unfavorable
.
Structure
or
draw the decision tree
Trees
start from
left to right
Trees
represents
decisions
and
outcomes
in
sequential order
Squares
represent
decision nodes
Circles
represent
states of nature nodes(outcomes)
Lines
or
Branches
connect the
decision nodes
and
the states of nature
Assign
probabilities
to the
state of nature
This is decision making
when there are
several possible states of nature
, and the
probabilities associated
with
each possible state are known
Suppose
each market outcome
has a
probability of occurrence of 0.50(50%)
.
Decision Making under risk
:
Estimate
payoffs
for
each possible combination of alternatives and states of nature
Solve
the
problem
by
computing expected monetary values (EMV)
for
each state of nature node
Expected Value of Sample Information
EVSI= [Expected Value
with
sample information,
assuming no cost to gather it] - [Expected value of best decision
without** sample information]
= (Expected Value with sample information + cost) - (Expected Cost without sample information
Utility
(Probability)(Utility Score)+(Probability)(Utility Score)