Decision Tree Decision making under uncertainty Operation Research
- Slides: 7
Decision Tree Decision making under uncertainty Operation Research December 29, 2014 RS and GISc, IST, Karachi
Decision Tree • When a series of decisions at different points in time are made • A decision tree enables a decision maker to decompose a large complex decision problem into several smaller problems
• In the absence of a market study, Colaco believes that Chocola has a 55% chance of being a national success and a 45% chance of being a national failure. • If Chocola is a national success, Colaco’s asset position will increase by $300, 000, and • if Chocola is a national failure, Colaco’s asset position will decrease by $100, 000 • If Colaco performs a market study (at a cost of $30, 000), there is a 60% chance that the study will yield favorable results (referred to as a local success) and a 40% chance that the study will yield unfavorable results (referred to as a local failure). • If a local success is observed, there is an 85% chance that Chocola will be a national success. • If a local failure is observed, there is only a 10% chance that Chocola will be a national success. • If Colaco is risk-neutral (wants to maximize its expected final asset position), what strategy should the company follow?
Decision Tree: Decision Fork • The decision tree is constructed with two kinds of forks: decision forks (denoted by ) and event forks (denoted by ). • A decision fork represents a point in time when Colaco has to make a decision. • Each branch emanating from a decision fork represents a possible decision
Decision Tree: Event Fork • An event fork is drawn when outside forces determine which of several random events will occur • Each branch of an event fork represents a possible outcome, and the number on each branch represents the probability that the event will occur
Decision Tree: Terminal Branch • A branch of a decision tree is a terminal branch if no forks emanate from the branch
