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DECISION ANALYSIS WITH SAMPLE INFORMATION 559

Figure 13.7 The PDC Decision Tree with Branch Probabilities

Strong (s ) 8
1
Small (d ) 0.94
1
6
Weak (s ) 7
2
0.06
Strong (s ) 14
1
Favourable Medium (d ) 0.94
2
Report 0.77 3 7 Weak (s )
2
0.06 5
Strong (s ) 20
1
Large (d 3) 0.94
8
Weak (s 2 ) –9
Market Research 0.06
2
Study Strong (s 1 ) 8
Small (d 1 ) 0.35
9
Weak (s 2 ) 7
0.65
Strong (s 1 ) 14
Unfavourable Medium (d ) 0.35
2
1 Report 0.23 4 10 Weak (s 2 )
5
0.65
Strong (s 1 )
20
Large (d 3) 0.35
11
Weak (s 2 ) –9
0.65
Strong (s ) 8
1
Small (d 1 ) 0.80
12
Weak (s 2 ) 7
0.20
Strong (s 1 ) 14
No Market Research Medium (d ) 0.80
2
5 13
Study Weak (s 2 )
5
0.20
Strong (s 1 ) 20
Large (d 3) 0.80
14
Weak (s ) –9
2
0.20

Figure 13.8 shows the reduced decision tree after computing expected values at
these chance nodes.
Next, move to decision nodes 3, 4 and 5. For each of these nodes, we select the
decision alternative branch that leads to the best expected value. For example, at
node 3 we have the choice of the small complex branch with EV(Node 6) ¼ 7.94, the
medium complex branch with EV(Node 7) ¼ 13.46 and the large complex branch
with EV(Node 8) ¼ 18.26. Thus, we select the large complex decision alternative
branch and the expected value at node 3 becomes EV(Node 3) ¼ 18.26.

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