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The Study Case of Decision Tree

An entrepreneur is considering three business alternatives and wants to determine the option with the highest profit and lowest risk. The alternatives are a food/beverage business, property business, or not opening a business. Various decision making criteria like maximax, maximin, regret, and expected monetary value are analyzed based on the potential outcomes and their probabilities to recommend the best alternative.

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Rahma
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20 views5 pages

The Study Case of Decision Tree

An entrepreneur is considering three business alternatives and wants to determine the option with the highest profit and lowest risk. The alternatives are a food/beverage business, property business, or not opening a business. Various decision making criteria like maximax, maximin, regret, and expected monetary value are analyzed based on the potential outcomes and their probabilities to recommend the best alternative.

Uploaded by

Rahma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Rahmatika Chasania Meilani

41619010005
Forum 11 Metode Stokastik

The Study Case of decision tree

An entrepreneur wants to invest his money by starting a new business. He has several
business alternatives that have been prepared but before he makes a decision he wants to see
which of the several alternative business options he wants to start will provide the most profit
and the smallest risk from the business to be built.
 Decision : Will an entrepreneur invest his money or not?
 Alternatif : - Business in the food and beverage sector
- Business in the property sector
- Not opening a business
 Outcomes : Demand will be high, medium, or low

Alternatives Outcomes (Demand) $


High Moderate Low
Business in the food and beverage sector 350.000 175.000 -50.000
Business in the property sector 500.000 300.000 -150.000
Not opening a business 0 0 0

The Answare
 Maximax Criterion
 The optimistic approach
 Assume the best payoff will occur for each alternative
Alternatives Outcomes (Demand) $
High Moderate Low
Business in the food and beverage sector 350.000 175.000 -50.000
Business in the property sector 500.000 300.000 -150.000
Not opening a business 0 0 0
Choose the Business in the property sector (best payoff)
 Maximin Criterion
 The pessimistic approach
 Assume the worst payoff will occur for each alternative
Alternatives Outcomes (Demand) $
High Moderate Low
Business in the food and beverage sector 350.000 175.000 -50.000
Business in the property sector 500.000 300.000 -150.000
Not opening a business 0 0 0
Choose the Not opening a business (best payoff)

 Criterion of Realism
 Uses the coefficient of realism (α) to estimate the decision maker’s optimism
 Realism payoff for alternative = α x (max payoff for alternative)+ (1- α) x (min payoff
for alternative) 0 < α < 1
 Suppose α = 0.50
Alternatives Realism Payoff $
Business in the food and beverage sector 150.000
Business in the property sector 175.000
Not opening a business 0
Choose the Business in the property sector (best payoff)

 Equally Likely Criterion


 Assumes all outcomes equally likely and uses the average payoff
Alternatives Average Payoff $
Business in the food and beverage sector 158.333
Business in the property sector 216.666
Not opening a business 0
Choose the Business in the property sector (best payoff)

 Minimax Regret Criterion


 Regret or opportunity loss measures much better we could have done
Regret = (best payoff) – (actual payoff)
Alternatives Outcomes (Demand) $
High Moderate Low
Business in the food and beverage sector 350.000 175.000 -50.000
Business in the property sector 500.000 300.000 -150.000
Not opening a business 0 0 0
The best payoff for each outcome is highlighted

 Regret Values
Alternatives Outcomes (Demand) $ Max
High Moderate Low Regret
Business in the food and beverage sector 150.000 125.000 50.000 150.000
Business in the property sector 0 0 150.000 150.000
Not opening a business 500.000 300.000 0 500.000
We want to minimize the amount of regret we might experience, so chose Business in the
food and beverage sector or Business in the property sector

 Decision Making Under Risk


 Where probabilities of outcomes are available
 Expected Monetary Value (EMV) uses the probabilities to calculate the average
payoff for each alternative
EMV (for alternative i) = ∑(probability of outcome) x (payoff of outcome)
 Expected Monetary Value (EMV) Method
Alternatives Outcomes (Demand) $ EMV
High Moderate Low
Business in the food and beverage sector 350.000 175.000 -50.000 182.500
Business in the property sector 500.000 300.000 -150.000 270.000
Not opening a business 0 0 0 0
Probability of outcome 30% 50% 20%
Choose the Business in the property sector
 Expected Opportunity Loss (EOL)
 How much regret do we expect based on the probabilities?
EOL (for alternative i) = ∑(probability of outcome) x (regret of outcome)
 Regret (Opportunity Loss) Values
Alternatives Outcomes (Demand) $ Max
High Moderate Low Regret
Business in the food and beverage sector 150.000 125.000 50.000 117.500
Business in the property sector 0 0 150.000 30.000
Not opening a business 500.000 300.000 0 300.000
Probability of outcome 30% 50% 20%
Choose the Business in the property sector

 Expected Value of Perfect Information (EVPI)


 The amount by which perfect information would increase our expected payoff
 Provides an upper bound on what to pay for additional information
EVPI = EVwPI – EMV
EVwPI = Expected value with perfect information
EMV = the best EMV without perfect information
 Payoffs in red would be chosen based on perfect information (knowing demand level)
Alternatives Outcomes (Demand) $
High Moderate Low
Business in the food and beverage sector 350.000 175.000 -50.000
Business in the property sector 500.000 300.000 -150.000
Not opening a business 0 0 0
Probability of outcome 30% 50% 20%
EvwPI = $300.000
 Expected Value of Perfect Information (EVPI)
EVPI = EVwPI – EMV
= $300.000 - $270.000
= $30.000
 Decision Trees (Thompson Lumber Tree with EMV’s)

Conlusion : Choose the Business in the property sector

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