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Chapter 3.

Decision Analysis
Section 3.1. Decision Trees with Conditional Probabilities
Example 3.1 . P&G's Tide
Table 3.1. Given
New Product Payoff
($000)
Tide with Zonrox
Tide with Downy
Do nothing
Probability

State of Market
Successful
Failure
20.0
-18.0
12.0
-3.0
0.0
0.0
0.60
0.40

Table 3.2.
Alternative

Maximum?

EMV

Tide with Zonrox

No

4.80

Tide with Downy

Yes

6.00

Do nothing

No

0.00

Market
Successful
Failure
Successful
Failure
Successful
Failure

Probability
0.60
0.40
0.60
0.40
0.60
0.40

Payoff
20.0
-18.0
12.0
-3.0
0.0
0.0

Section 3.2. Decision Trees with Revised Probabilities


Example 3.2. P&G's Tide
Table 3.3. Given
P(Survey\Market)
Positive
Negative
Prior Probability

State of Market
Successful
Failure
0.80
0.25
0.20
0.75
0.60
0.40

Table 3.4.
P(Survey\Market)

State of Market

Joint Probability

P(Survey)

P(Survey\Market)
Positive
Negative
P(Market\Survey)
Positive
Negative

Successful
Failure
0.80
0.25
0.20
0.75
Prior Probability
Successful
Failure
0.60
0.40
0.60
0.40

Successful
Failure
0.48
0.10
0.12
0.30
Posterior Probability
Successful
Failure
0.83
0.17
0.29
0.71

P(Survey)
0.58
0.42
Total
1.00
1.00

Example 3.3. P&G's Tide


Table 3.5. Given
New Product Payoff
($000)
Tide with Zonrox
Tide with Downy
Do nothing
Prior Probability
Cost of Survey

State of Market
Successful
Failure
20.0
-18.0
12.0
-3.0
0.0
0.0
0.60
0.40
1.0

Table 3.6.
Survey

Result

Probability

Positive

0.58

Product
Tide with
Zonrox
Tide with
Downy
Do nothing

Conduct

Tide with
Zonrox
Negative

0.42

Tide with
Downy
Do nothing
Tide with
Zonrox

None

None

1.00

Tide with
Downy
Do nothing

Market
Successful
Failure
Successful
Failure
Successful
Failure
Successful
Failure
Successful
Failure
Successful
Failure
Successful
Failure
Successful
Failure
Successful

Probability
0.83
0.17
0.83
0.17
0.83
0.17
0.29
0.71
0.29
0.71
0.29
0.71
0.60
0.40
0.60
0.40
0.60

Payoff
19.0
-19.0
11.0
-4.0
-1.0
-1.0
19.0
-19.0
11.0
-4.0
-1.0
-1.0
20.0
-18.0
12.0
-3.0
0.0

None

None

1.00
Do nothing

Failure

0.40

Decision 2
Maximum?

EMV

Yes

12.45

Tide with
Downy

No

8.41

Do nothing

No

-1.00

Tide with
Zonrox

No

-8.14

Tide with
Downy

Yes

0.29

Do nothing

No

-1.00

Tide with
Zonrox

No

4.80

Tide with
Downy

Yes

6.00

Do nothing

No

0.00

Table 3.7.

Survey

Decision 1
Maximum?

Conduct

None

Yes

No

EMV

7.34

6.00

Plant
Tide with
Zonrox

Table 3.8.
Survey

EMV

Cost

Total

Conduct
7.34
1.00
None
6.00
0.00
EV of Sample Information (EVSI)

8.34
6.00
2.34

Section 3.3 Utility Theory


Example 3.4. Softdrink Companies
Table 3.9. Given
Utility Table

0.0

Payoff
($000)
-10.0
-5.0
0.0
5.0
10.0

Coke
0.00
0.40
0.70
0.90
1.00

Company
Pop
0.00
0.25
0.50
0.75
1.00

Pepsi
0.00
0.10
0.30
0.60
1.00

Figure 3.1. Utility Curve


Utility Curve
1.00
0.80
0.60
Utility

Cok
e

0.40

Pop

0.20
0.00
-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0
Uti l i ty

Payoff

Table 3.10.
Propensity to Risk
Company
Coke
Pop
Pepsi

Propensity

Example 3.5. Softdrink Companies


Table 3.11. Given
New Investment Payoff
($000)
New Product
New Plant

State of Market
Successful
Failure
10.0
-10.0
5.0
-5.0

Cu rve

Do Nothing
Probability

0.0
0.52

0.0
0.48

Table 3.12.
New Investment Payoff
($000)
New Product
New Plant
Do Nothing
Probability
Decision

State of Market
Successful
Failure

EMV

Maximum?

Maximum

Table 3.13.
Company
New Investment Payoff
($000)
New Product
New Plant
Do Nothing
Probability
Decision

Coke
State of Market
Successful
Failure

Propensity to Risk
Utility
Successful
Failure

EUV

Maximum

Table 3.14.
Company
New Investment Payoff
($000)
New Product
New Plant
Do Nothing
Probability
Decision

Pop
State of Market
Successful
Failure

Propensity to Risk
Utility
Successful
Failure

EUV

Maximum

Table 3.15.
Company
New Investment Payoff
($000)

Pepsi
State of Market
Successful
Failure

Propensity to Risk
Utility
Successful
Failure

EUV

New Product
New Plant
Do Nothing
Probability
Decision

Maximum

U
ti l i ty

Cu rve