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Lecture 10B Decision Analysis: Sequen1al Decisions: Review & Overview
Lecture 10B Decision Analysis: Sequen1al Decisions: Review & Overview
290
Introduc1on
to
Quan1ta1ve
Decision
Making
Lecture
10B
Decision
Analysis:
Sequen1al
Decisions
1
Sequen1al
Decisions:
Good-Lame
An
investor
intends
to
purchase
one
piece
of
real
estate.
She
must
now
decide
among
an
apartment,
a
warehouse,
and
retail
space.
The
prot
made
by
the
investor
will
depend
on
future
economic
condi1ons,
which
may
be
Good
or
Lame.
Purchase
of
the
apartment
will
result
in
a
$55,000
prot
if
future
economic
condi1ons
are
Good,
and
$10,000
if
they
are
Lame.
The
corresponding
gures
for
the
purchase
of
a
warehouse
are
$30,000
for
Good
economic
condi1ons,
and
$20,000
for
Lame
condi1ons.
The
purchase
of
the
retail
space
will
result
in
a
$100,000
prot
if
future
economic
condi1ons
are
Good,
and
a
loss
of
$40,000
if
they
are
Lame.
Assume
that
there
is
a
60%
chance
that
future
economic
condi1ons
will
be
Good.
Also
assume
that
the
investor
will
use
expected
prot
as
the
basis
for
her
decisions.
2
Probability
0.6
0.4
EPPI
Prots
($1,000s)
Good
G
Lame
L
A
(apartment)
55
10
Expected
Prot
Recall
W
(warehouse)
30
20
R
(retail)
100
(-40)
with
Perfect
Informa4on
States
Decision
G,
L
A,
W,
R
TIME
Payo
100
//
A
55
G
68
//
W
30
0.6
Decision
R
100
Maker
0.4
10
20
//
A
L
EPPI
is
68
W
20
//
R
(-40)
Expected
Value
of
Perfect
Informa4on
EVPI
=
68
44
=
24
EMV
(44K)
Imperfect
Perfect
Informa4on
Informa4on
3
Good-Lame
(Con1nued)
Our
investor
may
hire
a
professional
economist
who
will
provide
addi1onal
informa1on
about
future
economic
condi1ons.
Ader
preliminary
discussions
with
the
economist,
the
investor
realizes
that
the
economist's
report
will
boil
down
to
a
forecast
that
the
economy
will
be
either
Booming,
Coas4ng,
or
Declining.
An
examina1on
of
past
forecasts
indicate
that,
when
the
future
economic
condi1ons
turned
out
to
be
Good,
the
economist
had
a
30%
chance
of
forecas1ng
a
Booming
economy,
and
a
50%
chance
of
forecas1ng
a
Coas4ng
economy;
whereas
when
the
future
economic
condi1ons
turned
out
to
be
Lame,
the
economist
had
a
45%
chance
of
forecas1ng
a
Declining
economy,
and
a
50%
chance
of
forecas1ng
a
Coas4ng
economy.
A
P(G|C)
55
//
G
P(L|C)
10
L
C W
P(G|C)
30
G
H P(C)
P(L|C)
L 20
R
P(G|C)
100
G
P(L|C)
L (-40)
A
P(G|D)
G 55
//
P(L|D)
Decision
L 10
D W
P(G|D)
Maker
G 30
P(D)
P(L|D)
L 20
R
P(G|D)
G 100
Considered
previously.
P(L|D)
L (-40)
H EMV
is
44
4
Our
investor
may
hire
a
professional
economist
who
will
provide
addi1onal
informa1on
about
future
economic
condi1ons.
Ader
preliminary
discussions
with
the
economist,
the
investor
realizes
that
the
economist's
report
will
boil
down
to
a
forecast
that
the
economy
will
be
either
Booming,
Coas4ng,
or
Declining.
An
examina1on
of
past
forecasts
indicate
that,
when
the
future
economic
condi1ons
turned
out
to
be
Good,
the
economist
had
a
30%
chance
of
forecas1ng
a
Booming
economy,
and
a
50%
chance
of
forecas1ng
a
Coas4ng
economy;
whereas
when
the
future
economic
condi1ons
turned
out
to
be
Lame,
the
economist
had
a
45%
chance
of
forecas1ng
a
Declining
economy,
and
a
50%
chance
of
forecas1ng
a
Coas4ng
economy.
We
know
A
priori
probability
ASIDE:
We
need
P(G|B),
P(G|C)
and
P(G|D).
P(G)
= 0.6
We
also
need
P(B),
P(C)
and
P(D).
P(L)
= 0.4
Given
here
condi&onal
joint
P(B|G)
= 0.30
P(GB)
P(G | B) =
P(C|G)
= 0.50
P(B)
marginal
P(D|L)
= 0.45
P(C|L)
= 0.50
5
Complete
the
decision
tree
Decision
States
Decision
States
H, H B,
C,
D
A,
W,
R
G,
L
TIME
Payo
P(B)
=
0.2
P(G|B)
=
0.9
A
50.5
P(G|B)=0.9
P(C)
=
0.5
P(G|C)
=
0.6
//
P(L|B)=0.1
G 55
P(D)
=
0.3
P(G|D)
=
0.4
86
L 10
B
//
W
29
0.9
G 30
P(B)=0.2
0.1
L 20
R
86
0.9
G 100
0.1
L (-40)
A
37
P(G|C)=0.6
//
.2(86)+.5(44)+.3(28)
//
P(L|C)=0.4
G
55
=
47.6
44
L 10
C
//
W
26
0.6
G 30
H P(C)=0.5
0.4
L 20
R
44
0.6
G 100
0.4
L (-40)
A
28
P(G|D)=0.4
55
G
P(L|D)=0.6
Decision
28
L 10
Maker
D W
24
0.4
P(D)=0.3
//
0.6
G 30
L 20
R
16
0.4
Considered
previously.
//
0.6
G 100
L (-40)
H EMV
is
44
Solve
the
decision
tree
Decision
States
Decision
States
by
folding
back
H, H B,
C,
D
A,
W,
R
G,
L
TIME
.9(55)
+
.1(10)
Payo
A
50.5
P(G|B)=0.9
//
P(L|B)=0.1
G 55
86
L 10
B
//
W
29
0.9
G 30
P(B)=0.2
0.1
L 20
R
86
0.9
G 100
0.1
L (-40)
A
37
P(G|C)=0.6
//
.2(86)+.5(44)+.3(28)
//
P(L|C)=0.4
G
55
=
47.6
44
L 10
C
//
W
26
0.6
G 30
H P(C)=0.5
0.4
L 20
R
44
0.6
G 100
0.4
L (-40)
A
28
P(G|D)=0.4
55
G
P(L|D)=0.6
Decision
28
L 10
Maker
D W
24
0.4
P(D)=0.3
//
0.6
G 30
L 20
R
16
0.4
Considered
previously.
//
0.6
G 100
L (-40)
H EMV
is
44
6
Solve
the
decision
tree
by
folding
back
Payo
A
50.5
P(G|B)=0.9
//
P(L|B)=0.1
G 55
86
L 10
B
//
W
29
0.9
G 30
P(B)=0.2
0.1
L 20
R
86
0.9
G 100
0.1
L (-40)
A
37
P(G|C)=0.6
//
.2(86)+.5(44)+.3(28)
//
P(L|C)=0.4
G
55
=
47.6
44
L 10
C
//
W
26
0.6
G 30
H P(C)=0.5
0.4
L 20
R
44
0.6
G 100
0.4
L (-40)
A
28
P(G|D)=0.4
55
G
P(L|D)=0.6
Decision
28
L 10
Maker
D W
24
0.4
P(D)=0.3
//
0.6
G 30
L 20
R
16
0.4
Considered
previously.
//
0.6
G 100
L (-40)
H EMV
is
44
Solve
the
decision
tree
by
folding
back
Payo
A
50.5
P(G|B)=0.9
//
L
P(L|B)=0.1
G 55
86 L 10
L
29
B W
0.9
P(B)=0.2
//
0.1
G 30
L 20
R
L
86
0.9
G 100
0.1
L (-40)
A
37
P(G|C)=0.6
//
.2(86)+.5(44)+.3(28)
//
L
P(L|C)=0.4
G
55
= 47.6 44 L 10
L
26
C W
0.6
P(C)=0.5
//
0.4
G 30
H L 20
R
L
44
0.6
G 100
0.4
L (-40)
A
28
P(G|D)=0.4
L
P(L|D)=0.6
G 55
Decision
28
L 10
Maker
D W
L
24
0.4
P(D)=0.3
//
0.6
G 30
L 20
R
L
16
0.4
Considered
previously.
//
0.6
G 100
L (-40)
H EMV
is
44
7
Solve
the
decision
tree
Decision
States
Decision
States
on
one
page
H, H B,
C,
D
A,
W,
R
G,
L
TIME
.9(55)
+
.1(10)
Payo
A
50.5
P(G|B)=0.9
//
P(L|B)=0.1
G 55
86
L 10
B
//
W
29
0.9
G 30
P(B)=0.2
0.1
L 20
R
86
0.9
G 100
0.1
L (-40)
A
37
P(G|C)=0.6
//
.2(86)+.5(44)+.3(28)
//
P(L|C)=0.4
G
55
=
47.6
44
L 10
C
//
W
26
0.6
G 30
H P(C)=0.5
0.4
L 20
R
44
0.6
G 100
0.4
L (-40)
A
28
P(G|D)=0.4
55
G
P(L|D)=0.6
Decision
28
L 10
Maker
D W
24
0.4
P(D)=0.3
//
0.6
G 30
L 20
R
16
0.4
Considered
previously.
//
0.6
G 100
L (-40)
H EMV
is
44
(h)
What
is
the
expected
value
of
sample
informa1on
from
the
economist's
forecast?
What
is
its
eciency?
Expected
Prot
If
the
cost
of
the
economist
<
$3,600,
hire
the
economist.
With
Without
Depending
on
what
the
economist
says,
choose
R
if
Economist
Economist
forecast
is
B
or
C,
and
choose
A
if
forecast
is
D.
If
the
cost
>
$3,600,
dont
hire
the
economist,
and
choose
47.6K
44K
R
(last
class).
8
EPPI
=
expected
prot
with
perfect
informa1on
EMV
=
expected
prot
with
uncertainty
(Expected
monetary
value)
EVPI
=
expected
value
of
perfect
informa1on
EVPI
=
EPPI
-
EMV
EPPI
EVPI
(68K)
(24K)
EVSI
(3.6K)
EPSI
EMV
(47.6K)
(44K)
Summary
Decision
tree
with
sequen1al
decisions
Expected
value
of
sample
informa1on
(EVSI)