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

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Presentation on theme: "Influence Diagrams & Basic Decision Trees MHA 6350 Dr. Burton."— Presentation transcript:

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

2 Graphic symbols 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 Capital Decision Value Invest? Venture Succeeds Or Fails Decision node Value node Chance node

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 AB E D C F GH 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. 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 Economic Value Usage decision Cancer Cost Basic Influence Diagram Net Value

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

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

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

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

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

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.


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