Amount of Snow

Tab!'" 1 1.12 Di stoSoti on of S no w a l l a nd Profit for Snow Fun Ski 1:1024trt

Profit S120,000 40,000 40,000

Probability of Ocprobabilities OA 0.2 0.4

More than 40 inches 20 to 4C inches Less than 20 inches

Chapter 4. But a decision tactionstains not only the probgoilities of outcomes, but also the Conditional monetary (or utility) values attached to those outcomes. Because of this, we canuse these trees to indicate the expected values of different act,ons we can take. Decision trees have standard symbols: Squares symbolize decision points, where the decision maker must choose among several possible actions. From these decision nodes, we draw one branch for each of the possible actions. Circles represent chance events, where some state of nature is realized. These chance events are not under the decision maker's control. From these chance nodes, we draw one branch for each possible outcome.
Decision-tree example: Running Let's a ski resort

use a decision tree to help Christie Stem, the owner and general manager of the Snow Fun Ski Resort, decide how the hotel should be run in the corning season. Christie's profits for this year's skiing season will 'depend on how much snowfall occurs during the winter. On the basis of previous experience, she believes the probability distribution of snowfall and the resulting profit can be summarized by Table 17-12. Christie has recently received an offer from a large hotel chain to operate the resort for the winter, guaranteeing her a 545,000 profit for the season. She has also been considering leasing snowmaking equipment for the season. If the equipment is leased, the resort will be able to operate full time, regardless of the amount of natural snowfall. If she decides to use snowmakers to supplement the natural snowfall, her profit for the season will be $120,000 minus the cost of leasing and operating the snowmaking equipment. The leasing cost will be about $12,000 per season, regardless of how much it is used. The operating cost will be S10,000 if the natural snowfall is more than 40 inches, $50,000 if it is between 20 and 40 inches, and $90,000 if it is less than 20 inches.

Christie'sdecisiontreeFigure 17-9 illustrates Christie's problem runningsion tree. The three branches ema-

nating from the decision node represent her three possible ways to operate the resort this winter: hiring the hotel chain, running it herself without snowmaking equipment, and run-fling it by herself with the snowmakers. Each of the last two branches terminates in a chance node representing the amount of snow that will fall during the season. Each of these nodes has three branches emanating from it, one for each possible value of snowfall, and the prob-abilities of that much snow are indicated on each branch. Notice that time flows from left to right in the tree; that is, nodes at the left represent actions or chance events that oc-cur before nodes that fall farther to the right. It is very important to maintain the proper time sequence when 'constructing decision trees. At the end of each rightmost branch is the net profit that Christie will earn if a path is followed from the root of the tree (at the decision node) to the top of the tree. For example, if she operates the resort herself with thedecision and the snowfall is between 20 and 40 inches, her profit will be $58,000, ($120,000 less $12,000 to lease the snowmaker and $50,000 to operate it). The other net profits are calculathaptermilarly. 4f..q1,11 a rIA,ii,ron tree We can now begin to analyze Christie's decision tree. (The prDistributions from the right (at the top of the tree) and works back to the left (to the root of the tree). In t f) hoter17 Decision Theory f),j, r .