1. Influence Diagrams & Basic Decision Trees
MHA 6350
Dr. Burton

2. Graphic symbols Nodes Arrows (arcs) are used to connect nodes
Square = decisions
Circles = chance events
Rectangles with rounded corners = values
Arrows (arcs) are used to connect nodes
A node at the beginning of an arc is called a predecessor
A node at the end of an arc is a called a successor

3. Venture
Succeeds
Or Fails
Value
Invest?
Chance node
Decision node
Value node
Venture Capital Decision

4. Rules for using arcs (arrows)
Two kinds of arcs
Solid: Point to chance and value nodes
Dashed: Point to decisions
Indicates the decision is made knowing the outcome of the predecessor node.

5. A B F E
The outcome of Event A is
relevant for assessing the
chances associated with
Event B.
The decision maker knows
outcome of Event E when
making Decision F. C D G H
Decision C is relevant for
assessing the chances
with Event D.
Decision G is made before Decision H.

6. Building an influence diagram
EPA must decide whether to use an economically beneficial chemical that may be carcinogenic.
The decision must be made without perfect information about either the long-term benefits or health hazards.
Alternative courses of action:
-permit use of the chemical
-restrict its use
-ban it altogether
Tests can be run to learn about the carcinogenic potential of the material.
Survey data can indicate the extent of exposure when people use the chemical.

7. Usage
decision
Economic
Value
Net
Value
Cancer
Cost
Basic Influence Diagram

8. Usage
decision
Economic
Value
Net
Value
Human
Exposure
Cancer
Cost
Cancer
Risk
Carcinogenic
potential
Intermediate Influence Diagram

9. Test
Usage
decision
Economic
Value
Survey
Net
Value
Human
Exposure
Cancer
Cost
Cancer
Risk
Carcinogenic
potential
Completed Influence Diagram

10. Common Mistakes
Influence Diagrams should not be confused with flow charts which are sequential in nature.
Building influence diagrams with many chance nodes pointing to a primary decision node.
Inclusion of cycles (circular paths among nodes).

11. Influence diagram vs. Decision tree
Influences diagrams are excellent for displaying a decision’s structure, but they hide many details.
A decision tree reveals more of the decision diagrams surface details.

12. Basic Decision tree (A politician’s decision)
A popular political candidate’s options:
Run for reelection to House of Rep.
Run for a Senate seat
If she chooses to run for the Senate there is a chance of losing.
Source: Clemen,1990

13. Run for reelection
U.S. Representative (intermediate)
Win
U.S. Senator (best)
Run for Senate
Lose
Lawyer (worst)
Basic Risky Decision

14. Win
U.S. Representative
Run for reelection
Lose
Small-time Lawyer
Win
U.S. Senator
Run for Senate
Lose
Big-time Lawyer
Double-Risk Decision

15. Accept Settlement
Known Amount
Highest
Reject Settlement
Amount of Court Award
Lowest
Range-of-Risk Decision

16. Exercise. (Given the information below draw a decision tree.)
You have just bought a new $500 outfit.
You are leaving for work.
You consider taking an umbrella which will protect your outfit if it rains.
Without the umbrella, the outfit could be ruined.
If it does not rain, carrying the umbrella will be an inconvenience.