Welcome to this Decision Analysis tutorial

for constructing decision trees. We will be constructing a basic decision tree. We will also be making decisions using the expected value approach. We will be constructing a decision tree using this payoff table, where payoffs are profits

and the probabilities of the states of nature are .4 and .6 respectively. Decision trees use two types of nodes: A square or rectangle node called DECISION NODE from which decision alternative branches will originate, and a circle node called CHANCE NODE from which states of nature or outcome branches will emanate. The CHANCE NODE is also referred to as an

OUTCOME NODE or EVENT NODE Now let’s construct a decision tree for this

PAYOFF table. We first draw a decision node with branches coming out of the decision node representing decision alternatives. Next we draw the chance node or outcome node with respective states of nature or outcomes. As it can be seen here for stocks. The payoffs are placed at the end of the branches

as you can see (70 and -13 for Stocks). We do the same for Mutual Funds and for Bonds. Notice that the payoff is 20 for Bonds irrespective of the state of nature. Therefore, we really don’t need to repeat 20, we simply need to draw a single branch from BONDS with a payoff of 20. Now let’s solve the decision tree. Solving the decision tree is also known as folding back the decision tree. In essence, we are going to calculate the expected values and then choose the best. For Stocks, the expected value is calculated as .4 times 70 + .6 times -13 which is 20.2. So we just usually write the 20.2 on the chance node for stocks. We do the same for mutual funds. The expected value is. 4 times 53 + .6 times -5 which is 18.2. We also write that on the chance node for mutual funds. For Bonds, no calculation is required. We can only expect a payoff of 20 (for Bonds). Now comparing the three values: 20.2, 18.2, and 20, the best expected value is 20.2. We usually just place that value close to the decision node. Therefore, the decision is to invest in Stocks. Thanks for watching!

EXCELLENT!!!

Be my professor please

yes you helped me just in time have a quiz in a hour… subscribe hopefully your channel has all the materials my class will cover.. excellent job in explaining ðŸ™‚

nice voice and techã€‚

cool!!!

You explain in three minutes completely, what takes 45 minutes to an hour to learn in part

Excellent thank you

you're awesome!!

Couldn't understand my professor explaining this to me in 3 hours.. but I understood you in 3 minutes awesome thank you !!!!

Superb explanation of this large concept in only 3 MIn. Thanks for it.

Thank you for simplifying this ðŸ™‚

Hi Joshua, is it possible to have 3 branches (to represent the following decision alternatives namely D1, D2 and D3) coming out of the decision node, but with decision alternative D3 being split into D3a (work with company ABC: 40%)Â and D3b (work with company XYZ: 60%) via chance node?Â Â Â Â Â Â Each of the decision alternatives: D1, D2, D3a and D3b will also have chance node (high sales: 20% and low sales: 80%)Â Â Â Â Â Â Â Â Â Is that too many chance node? Or should D3 be a decision node instead of a chance node?Â Â Â Â Â Â Â I hope this is not too confusing. Thanks!

if i'm the decision maker i will opt to choose bond instead of stock. doesn't matter it is growing or declining you will still get 20 compare to stocks. If the end value of stock is bigger than bonds by higher margin instead of 0.2 i may choose stocks.

How to calculate probabilities ?

Best explanation thus far in 3 minutes. I'm impressed; great example!!!

Thanks sir

Thank you man

…my literal words after your video ended "thanks for explaining!"

Wow you're the best. May the Lord greatly bless you

are u a professor in an university or something? If not, they need to hire you soon if not now.

Awesome video and explanation man!!! Thanks for your help ðŸ˜€

TriHard

Thank you so much……Superb !!!!

Straight to the point. Thanks man!

Clear and concise explanation.Very helpful and much appreciated. Thanks for sharing.

helpfull Man !

Very methodological, clear Englsh for non-native speakers, academically organized and very understandable, thanks fro making this great video

very clearly explained thank you

Excellent

I am having problems with ctree build I excel when I go to the userdata tab click build tree does not work. Do you know how I can fix this

Thanks for being a life saver … I am so lost in class but you make it easy to understand

Thank you

Thank you very Much Joshua..!!

It's short and clear, and mostly understandable, thanks sir, it's helpful

You are really good.

I wish I knew you in my undergraduate days. Well, it's better late than never.

Thank you

Excellent explanation! 2 Hour lecture in 3 minutes.

Bro if there is no names of alternatives like stocks are not given then can we just put alphabets on the alternative and solve it plz reply I got a paper day after tomorrow if u want I can give u the question By fb and if u solve it then it will be great help

this is just awesome. keep up the good work

Great video

THX

give him noble please!!!!!!!!!!!!!!!!!!!!

ðŸ˜Š thnku

Excellent

Thank you so much for the explanations, I found my teaching of rational decisions among alternative courses of actions easy for the undergraduate students. It also affords my students in game theory class the opportunity to understand better. Great job, really grateful

thank you soooo much !

You just made life easier! Thanks for the simple and helpful explanation.

This is a very nice and clear presentation. I will refer my students to it who need another voice explaining the concept. Thank you Joshua.

Thank u Josh ðŸ™‚

This man is a guru

You are the best. Great job

Thank you soo much, this is way better than my class lecture!

Thank you Joshua. You have simplified my assigmnet ver well. Aaron Keyella, Tanzania

You are the shit!

it took a whole semester to barely know what these means , but u sir made me understand within 3 minutes. thank you

God bless Joshua! Thank you so much

bless up

Liked

Short and to the point.. Big thanks

nogro ughandin botch

.

Could you help out with this problem.

. A large steel manufacturing company has three options with regards to production: (i) produce commercially (ii) build pilot plant (iii) stop producing steel. The management has estimated that their pilot plant, if built, has 0.8 chance of high yield and 0.2 chance of low yield. If the pilot plant does show a high yield, management assigns a probability of 0.75 that the commercial plant will also have a high yield. If the pilot plant shows a low yield there is only a 0.1 chance that the commercial plant will show a high yield. Finally, managementâ€™s best assessment of the yield on a commercial â€“size plant without building a pilot plant first has a 0.6 chance of high yield. A pilot plant will cost N300,000. The profits earned under high and low yield conditions are N12,000,000 and N1,200,000 respectively. Find the optimum decision for the company.

Hi,,is it possible to have an specific probability on every options like stocks 50%, growth, 50% decline, probability on purchase 60% growth, 40% decline?

Or having 4 options having different growth rates?,,,which probabilty percentage will i choose? All four have varied percentage like 1 has 30% growth, 2 has 50%, 3 has 60%, 4 has 65%

Perfect

Incredible…you made it so, so simple Thank you!!!

Thx. you teaching better than my teacher ðŸ˜‚ðŸ˜‚

Thanks

You are an absolute beauty. This made everything so simple. Thanks Joshua

Hi Joshua. Thank you for posting. Your videos are brilliant, you simplify well and your videos provide a great understanding of the topic. Thanks for sharing

Thanks Emanuel. This was helpful

How did you come up with 0.4,0.6 calculation?

Quite awesome and helping