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You are on page 1of 16

Dr. T. T. Kachwala

Decision Tree is a pictorial

representation

of

the

decision process.

It represents the State of

nature with the associated

probability and strategies

with the associated payoff.

Slide 3

Decision Tree comprises of two basic elements

1.Nodes

2.Branches.

Nodes: There are two types of nodes:

1.The Decision node is represented by a square

2.The Chance node is represented by a circle

D

C

Slide 4

The decision node

The chance node

represents a point on the decision

C

tree where a decision maker evaluates the outcome of his

decision.

Slide 5

Branches: are lines or segments that connect the nodes.

D

Decision Branch

(i)Decision branch

signifies the branch that commences from the

decision node. It signifies the strategy the decision

maker selects at that point.

D

Slide 6

Chance Branch

signifies the branch that commences from the

chance node. It signifies the state of nature that

occurs at that point.

C

decision tree. It is not followed by either

decision or chance node. The terminal branches

are mutually exclusive & collectively exhaustive

at that point.

Ch

c

De

is

a

Br

n

io

eB

c

n

c

ran

Terminal Branch

h

nc

Terminal Branch

Terminal Branch

Slide 8

The objective of drawing a decision tree is multiple

stage decision analysis.

The calculation starts with the terminal branch. Starting

from the terminal branch we calculate the position

value progressively at each node & roll back to the

earlier node till we reach the initial node.

Slide 9

The position value at the chance node is the EMV at

that point. The position value at the decision node is

the maximum payoff amongst the branches at that

point.

In the process of rolling back to the initial node, we

identify a series or sequence of optimum strategies

that maximizes the payoff at the initial node.

Roll back

EMV

maximum

payoff

Bayesian Approach is an amalgamation of two theoretical

disciplines Bayes Theorem & Decision Tree Analysis

The so called Bayesian approach to the problem

addresses itself to the question of determining the

probability of some event Ai given that another event B has

been observed, i.e. determining the value of P(Ai/B).

One of the most interesting applications of the results of the probability

theory involves estimating unknown probabilities and making decisions

on the basis of new (sample) information.

Decision theory is another field of study, which is based on Bayes

theorem. This theorem consists of a method of calculating conditional

probabilities.

Thomas Bayes developed a simple rule for calculating Posterior or

Revised Probability given the Prior Probabilities & Conditional

Probabilities popularly referred as Bayes Theorem

Let A1 and A2 be a set of events

which are mutually exclusive

and collectively exhaustive as

indicated in the Venn diagram (i)

such that it intersects with

both A1 and A2 as

indicated in the Venn

diagram (ii)

probability P(Ai/B)

P(A1) and P(A2) are the prior probabilities (simple probabilities

prior to occurrence of event B).

P(B/A1) is the conditional probability of B given that A1 has

occurred.

P(B/A2) is the conditional probability of B given that A2 has

occurred.

Given the values of P(A1), P(A2), P(B/A1) and P(B/A2) the

following table on the next slide explains the calculations of

P(Ai / B) using Bayes Theorem.

probability P(Ai/B)

Event

Prior

Probability

Conditional

Probability

Joint

Probability

Posterior

Probability

(1)

(2)

(3)

A1

P (A1)

P (B/A1)

P (A1B)

P (A1/B)

A2

P (A2)

P (B/A2)

P(A2B)

P(A2/B)

P (B)

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