Decision Making

4.1 Is it is not possible to solve a decision tree version of a problem and

an equivalent influence diagram version and come up with a different
answer? If so, explain. If not, why not?
As learnt from Chapter 3 Structuring Decision, Influence diagrams and
Decision trees are called isomorphic, meaning that they are equivalent
representations. Both are worth-while, and they complement each other well.
Hence it is not possible to solve a decision tree version of a problem and an
equivalent influence diagram version and come up with a different answer. At
least, not if the decision tree and influence diagram each represent the same
problem (identical details and definitions). The solution to any given problem
should not depend on the representation. Thus, as long as the decision tree
and the influence diagram represent the same problem, their solutions should
be the same.
4.2 Explain in your own words what it means when one alternative
stochastically dominates another?
Stochastic dominance refers to situations where one probability can be ranked
as superior to another probability in all cases. It is based on predetermined
preferences regarding desired outcomes. It can be as simple as ranking
outcomes from favorite to least or may be calculated in the case of EMV. In a
cumulative risk profile all results of a strategy exhibiting stochastic dominance
would either coincide or be to the right of other strategies.
4.3 The analysis of the Texaco- Pennzoil example shows that the EMV of
counteroffering with$5 billion far exceeds $2 billion. Why might
Liedtke want to accept the $2 billion anyway? If you were Liedtke,
what is the smallest offer from Texaco that you would accept?
The answer for this question depends on individual thinking, a variety of
reasonable answers exist. For example, it could be argued that the least
Liedtke should accept is $4.63 billion, the expected value of his Counteroffer
$5 billion alternative. However, this amount depends on the fact that the
counteroffer is for $5 billion, not some other amount. Hence, another
reasonable answer is $4.56 billion, the expected value of going to court. If
Liedtke is risk-averse, though, he might want to settle for less than $4.56
billion. If he is very risk-averse, he might accept Texacos $2 billion counteroffer
instead of taking the risk of going to court and coming away with nothing. If I
were Liedtke the smallest offer from Texaco that I would accept is $4.63 billion.
4.4 Solve the Decision tree in the figure

1 | Page

Decision Making

To solve the given Decision tree, we must compute the expected value at each
probability
(or
circle)
node.
To compute the expected value at each node, we will work backward:
EMV (A) = 0.1(20) +0.2(10) + 0.6(0) + 0.1(-10)
=2+2+0-1
=3
EMV (B) = 0.7(5) +0.3(-1)
= 3.5 0.3
= 3.2
4.5 Use Precision Tree to create and solve the influence diagram that
corresponds to the decision tree in Figure
Following figure shows how to solve the influence diagram by hand

2 | Page

Decision Making

The most challenging part of implementing the influence diagram is to enter

the payoff values. The payoff values reference the outcome values listed in the
value table. In order for the influence diagram to calculate the expected value
of the model, it is necessary to fill in the value tables for all diagram nodes.
Change a value or probability in the diagram, and you will immediately see the
impact on the results of the model. It is possible to use formulas that combine
values for influence nodes to calculate the payoff node vales.
Following is the Solution for the influence diagram corresponding to the
decision tree:
Reduced
1 Event B
Choice
A

Event
A
EMV
20

20
3 | Page

Decision Making

10
0
-10
20
10
0
-10

10
0
-10
3.2
3.2
3.2
3.2

Reduced
2 Event A
Event
Choice
A
A
B
3 Reduce Choice
B

EMV
3.0
3.2
3.2

4.6 Solve the decision tree in the given figure. What principle discussed
in Chapter 4 is illustrated by this decision tree?

Following is the Solution for the decision tree:

EMV (A) = 0.1(20) +0.2(10) + 0.6(6) + 0.1(5)
= 2 + 2 + 3.6 + 0.5
= 8.1
EMV (B) = 0.7(5) +0.3(-1)
= 3.5 0.3
= 3.2
This problem demonstrates deterministic dominance. All of the outcomes in A
are at least as good as the outcomes in B.

4 | Page