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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
No
4.80
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
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
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
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
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
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