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Decision Tree

The document discusses decision trees as a tool for making sequential or multi-period decisions, emphasizing the importance of considering interrelated decisions based on new information. It explains the components of a decision tree, including decision nodes and chance nodes, and provides numerical examples to illustrate how to construct and evaluate decision trees for various scenarios. The document highlights the need for decision makers to analyze potential outcomes and payoffs to determine the most preferred course of action.

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Sibananda Biswal
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14 views

Decision Tree

The document discusses decision trees as a tool for making sequential or multi-period decisions, emphasizing the importance of considering interrelated decisions based on new information. It explains the components of a decision tree, including decision nodes and chance nodes, and provides numerical examples to illustrate how to construct and evaluate decision trees for various scenarios. The document highlights the need for decision makers to analyze potential outcomes and payoffs to determine the most preferred course of action.

Uploaded by

Sibananda Biswal
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Decision

Tree
By
Dr.Prabin
Kumar Padhy
Decision Tree
Decision Making problems all have been limited to a
single decision over one period of time. This is because the
payoff, states of nature, are not subject to change.
However situations may arise when a decision maker
needs to revise his previous decisions related to getting
new information and to make a sequence of several
interrelated decisions over several future periods .Thus he
should consider the whole series of decisions
simultaneously.
Such a situation is called a sequential or multi period
decision process. For example ,in the process of
marketing a new product the first decision is often test
marketing, and the alternative courses of action might be
either intensive testing or gradual testing. Given the
various possible consequences –good, fair or poor, the
decision maker may
Given the various possible consequences –
good, fair or poor, the decision maker may
be required to decide between redesigning
the product or an aggressive advertising
compaign or complete withdrawal of
product etc based on that decision there
will be an outcome that leads to another
decision.
A decision tree analysis involves the
construction of a a diagram that shows at a
glance when the decisions are expected to
be made –in what sequence their possible
consequences and what are related payoffs
The result of the computations can be shown
directly on the trees.A decision tree consists of
nodes,brances,probability estimates, and
payoffs. There are two types of nodes, decision
nodes, chance nodes.
A decision node is usually represented by a
square and indicates a place where a decision
maker must select one alternative course of
action among the available actions. The
alternative course of action are shown as
branches or arcs emerging out of decision
node.If there is a cost or profit associated with a
course of action ,it is necessary to keep track of
it along the path.
Each course of action may result in chance mode.The
chance node is represented by a circle and indicates a
point at which the decision maker will discover the
response to his decision
Numerical:-1
You are given the following estimates
concerning Research & Development
Programme:
Decisi Probabili Outcom Probabili Payoff
on ty of e ty of s
(D1) decsion Number outcome
Develop 0.5 1 0.6 600
2 0.3 (100)
3 0.1 0
Do not 0.5 1 0.0 600
Develop
2 0.0 (100)
3 1.0 0
Construct and evaluate the decision tree
diagram for the above data. Show your working
for evaluation.
Numerical:2
A glass factory that specializes in crystal is developing a
substantial backlog anf for this firm’s management is
considering three courses of action. To arrange for
subcontracting(S1) to begin overtime production (S2) and
to construct new facilities(S3).The correct choice depends
largely upon the future demand, which may be low,
medium,or high. By consensus ,management ranks the
respective probabilities as 0.10,0.50, and 0.40.A cost
analysis reveals the effect upon the profits.This is shown
in the table below:

Contd…….
Dema Probabil
nd ity
S1 S2 S3
Subcontra Begin Construc
cting Overti t
me facilities
Low(L) 0.10 10 (20) 150
Mediu 0.50 50 60 20
m
(M)
Show this decision situation in the form of a
High(H 0.40 50 100 200
decision
)
tree and indicate the most preferred
decision and the corresponding expected value
Numerical:3
A firm owner is seriously considering of drilling a farm
well in the past, only 70% of wells drilled were
successfully at 200 feet of depth in the area. Moreover on
finding no water at 200ft ,some persons drilled it further
upto 250ft but only 20% struck water at 250 ft.The
prevailing cost of drilling is Rs.50 per foot. The farm
owner has estimated that in case he does not get his own
wells, he will have to pay Rs.15,000 over the next 10
years,in PV term, to buy water from the neighbour. The
following decisions can be optimal.
(i)Do not drill any well
(ii)Drill upto 200 ft
(iii)If no water is found at 200 ft drill further upto 250 ft
Draw an appropriate decsion tree and determine the farm
owner’s strategy under EMV approach

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