QAMIII,20102011

ProblemSheet3:DecisionAnalysis
Case1. Supposethatyouwanttoinvest$10,000inthestockmarketbybuyingsharesinoneoftwocompanies: AandB.SharesinCompanyAareriskybutcouldyielda50%returnoninvestmentduringthenextyear in a rising market (i.e. ``bull'' market). If the stock market conditions are not favorable i.e,``bear'' market),thestockmaylose20%ofitsvalue.CompanyBprovidessafeinvestmentswith15%returnina ``bull''marketandonly5%ina``bear''market.Allthepublicationsyouhaveconsultedarepredictinga 60% chance for a ``bull'' market and 40% for a ``bear'' market. Where should you invest your money according to the EMV Criterion? Further, instead of solely relying on the publications, suppose you decidedtoconsultyourfriendwhohasagreatexperienceofstockmarket.Thefriendoffersthegeneral opinionof``for"or``against"investment.Thisopinionisfurtherquantifiedinthefollowingmanner:Ifit isa``bull"market,thereisa90%chancethatvotewillbe``for".Ifitisa``bear"market,thechanceofa ``for"voteis50%.Constructthecompletedecisiontreeandtellhowdoyoumakeuseofthisadditional information? A TV Co. is considering the development of a new collection of programs. The co. has the following options. Decideimmediatelywhethertoproducetheseries Produce and test market a single pilot in several representative market cities, to gauge the audience response to the show before making the decision whether to produce the complete series. Payaprofessionalmarketinggrouptoassessthelikelyoutcomeoftheproposedseries. Theprogrammaybesuccessfulornotsuccessful.Successfulprogramsgenerateanaverageof$18min revenue,whereasunsuccessfulonesgenerate$4mRevenue.P(S)=0.34 Productioncostisgiventobe$10m.Apilotcosts1mtoproducebutwillbeusedastheoneshowinthe series,ifthecompleteseriesismarketedusingthisstrategy,thispilotcostisincludedinthe10m. 86% of the successful series had favorable survey findings on their pilots. However, 15% of the failed seriesalsoreceivedfavorablesurveysbasedontheirpilots. Theprofessionalmarketsurveyapproachwillcost0.5m.Inthepast62%oftheseriesthatweregiven favorable reports by thus co. were successful. This co. has written unfavorable surveys in 51% of the casesthattheyhaveservedasconsultants. If an athlete is tested for a certain type of drug usage, then the test result will be either +ve or ve. However these tests are never perfect. Some athletes who are drug free test +ve and some who are druguserstestve.5%ofallathletesusedrugs,3%ofalltestsondrugfreeathletesyieldfalse+veand 7%ofalltestsondrugusersyieldfalseve.Therearesomedifficultiesinperformingthetests. ThebenefitB(=25)fromcorrectlyidentifyingadruguserandbarringhim/herfromsports. ThecostC1(=1)ofthetestforasingleathlete. ThecostC2(=50)offalselyaccusinganonuserandbarringhim/herfromsports. ThecostC3(=20)ofnotidentifyingadruguser.(eitherbynottestingorbyobtainingafalse ve.) ThecostC4(=2)ofviolatinganonusersprivacybyperformingthetest.

Case2.

Case3.