Thanks to visit codestin.com
Credit goes to www.scribd.com

Scribd
Upload
84 views13 pages

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
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
84 views13 pages

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
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

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!

You might also like