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Decision Tree Analysis: Prepared By: Dafny B. Ferrer

- Decision trees are schematic models that show alternative decisions and possible consequences using nodes and branches. Square nodes represent decisions and circular nodes represent chance events. - To analyze a decision tree, expected values are computed for each decision path by assigning values to consequences based on their probability of occurrence. - The example decision tree shows a manager deciding whether to prepare a bid for a contract. Preparing the bid costs $5,000. There is a 60% chance of winning, with a 70% chance of a $60,000 profit or 30% chance of a $15,000 fine. Computing the expected values down the tree shows a higher expected value of $17,500 for preparing the bid compared to $

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Justin Paul Vallinan
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51 views

Decision Tree Analysis: Prepared By: Dafny B. Ferrer

- Decision trees are schematic models that show alternative decisions and possible consequences using nodes and branches. Square nodes represent decisions and circular nodes represent chance events. - To analyze a decision tree, expected values are computed for each decision path by assigning values to consequences based on their probability of occurrence. - The example decision tree shows a manager deciding whether to prepare a bid for a contract. Preparing the bid costs $5,000. There is a 60% chance of winning, with a 70% chance of a $60,000 profit or 30% chance of a $15,000 fine. Computing the expected values down the tree shows a higher expected value of $17,500 for preparing the bid compared to $

Uploaded by

Justin Paul Vallinan
Copyright
© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
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DECISION TREE

ANALYSISPREPARED BY: DAFNY B. FERRER


PREPARED BY: DAVY B. FERRER MAED-MATH
•Construct Decision Tree
•Make Decision using Expected
Value (E.V.)
J. Ross Quinlan
(1943)
•A decision tree is a schematic
model of alternative available to
the decision maker, along with
their possible consequences.
•Composed of a number of
nodes that have branches
emanating from it.
A square represents
a decision point.
A circle stands for a
chance event.

***Note: The branches of the tree having square nodes


represent alternatives and branches having circular
notes represent chance events.
COMPUTE THE EXPECTED VALUE FOR
EACH DECISION PATH
ASSIGN A VALUE OF THE IMPACT
OF THE RISK WHEN IT OCCURS
ASSIGN A PROBABILITY
OF OCCURRENCE
DOCUMENT A DECISION
IN A DECISION TREE
ALTERNATIVES GROWING DECLINING
STOCKS 70 -13
MUTUAL FUNDS 53 -5
BONDS 20 20
PROBABILITY 0.4 0.6
The manager of the company has to decide whether to prepare a bid
or not. It costs P5,000 to prepare the bid. If the bid is submitted, the
probability that the contract will be awarded is 60%. If the company
is awarded the contract, it may earn an income of P60,000 if it
succeeds or pay a fine of P15,000 if it fails. The probability of success
is estimated to be 70%. Should the owner prepare the bid?
Success
60,000 – 5,000
Contract Awarded P= 0.7
P= 0.6
Failure
-15,000 – 5,000
Not Awarded P= 0.3
-5,000
Not prepare P= 0.4
Compute for the E. V. backward from position.
𝑬. 𝑽. = 𝟎. 𝟕 𝟓𝟓, 𝟎𝟎𝟎 + 𝟎. 𝟑 −𝟐𝟎, 𝟎𝟎𝟎
= 𝟑𝟖, 𝟓𝟎𝟎 − 𝟔𝟎𝟎𝟎
= 𝟑𝟐, 𝟓𝟎𝟎
𝑬. 𝑽. = 𝟎. 𝟔 𝟑𝟐, 𝟓𝟎𝟎 + 𝟎. 𝟒 −𝟓, 𝟎𝟎𝟎
= 𝟏𝟗, 𝟓𝟎𝟎 − 𝟐, 𝟎𝟎𝟎
= 𝟏𝟕, 𝟓𝟎𝟎
Success
55,000
Contract Awarded P= 0.7
P32,500
P= 0.6
P17,500 Failure
5,000
Not Awarded P= 0.3
Not prepare -5,000
P= 0.4

DECISION: The manager should therefore


decide to prepare the bid.
THANK YOU!

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