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    Exhibit 12.9: Nodes. The Square Is A Decision Node, and The Branches Emanating From A Decision Node Reflect The

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    JP
    The document discusses using a decision tree tool to analyze a real estate investment decision. It shows how to construct a basic decision tree with 3 branches emanating from the first node. The expected payoffs at each branch are then used to determine that the highest payoff, and therefore best decision, is to purchase the office building represented by the branch from node 1 to node 3. It notes that for decisions with only one choice, a decision tree yields the same result as expected value analysis, but decision trees are useful when there are sequences of decisions to be made.

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    Exhibit 12.9: Nodes. The Square Is A Decision Node, and The Branches Emanating From A Decision Node Reflect The

    Uploaded by

    JP
    59 views1 page
    The document discusses using a decision tree tool to analyze a real estate investment decision. It shows how to construct a basic decision tree with 3 branches emanating from the first node. The expected payoffs at each branch are then used to determine that the highest payoff, and therefore best decision, is to purchase the office building represented by the branch from node 1 to node 3. It notes that for decisions with only one choice, a decision tree yields the same result as expected value analysis, but decision trees are useful when there are sequences of decisions to be made.

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    The document discusses using a decision tree tool to analyze a real estate investment decision. It shows how to construct a basic decision tree with 3 branches emanating from the first node. The expected payoffs at each branch are then used to determine that the highest payoff, and therefore best decision, is to purchase the office building represented by the branch from node 1 to node 3. It notes that for decisions with only one choice, a decision tree yields the same result as expected value analysis, but decision trees are useful when there are sequences of decisions to be made.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    59 views1 page

    Exhibit 12.9: Nodes. The Square Is A Decision Node, and The Branches Emanating From A Decision Node Reflect The

    Uploaded by

    JP
    The document discusses using a decision tree tool to analyze a real estate investment decision. It shows how to construct a basic decision tree with 3 branches emanating from the first node. The expected payoffs at each branch are then used to determine that the highest payoff, and therefore best decision, is to purchase the office building represented by the branch from node 1 to node 3. It notes that for decisions with only one choice, a decision tree yields the same result as expected value analysis, but decision trees are useful when there are sequences of decisions to be made.

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    © All Rights Reserved
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    of 1

    tool for developing the decision tree.

    The “Decision Tree Creation” window automatically will show “1”


    as the “Selected node” and the “Number of branches to add” as “2,” so the first step is to increase this to
    “3” and then click on “Add 3 DECISIONS from node 1.”This will result in the three new branches
    connected to nodes 2, 3 and 4, as shown in Exhibit 12.9.
    Exhibit 12.9

    Next, we use the Decision Tree Creation probability node:


    These values are now shown as the expected payoffs from each of the three branches emanating from
    node 1 in Figure 12.3. Each of these three expected values at nodes 2, 3, and 4 is the outcome of a
    possible decision that can occur at node 1. Moving toward node 1, we select the branch that comes from
    the probability node with the highest expected payoff. In Figure 12.3, the branch corresponding to the
    highest payoff, $44,000, is from node 1 to node 3. This branch represents the decision to purchase the
    office building. The decision to purchase the office building, with an expected payoff of $44,000, is the
    same result we achieved earlier by using the expected value criterion. In fact, when only one decision is
    to be made (i.e., there is not a series of decisions), the decision tree will always yield the same decision
    and expected payoff as the expected value criterion. As a result, in these decision situations a decision
    tree is not very useful. However, when a sequence or series of decisions is required, a decision tree can be
    very useful.
    process. This makes it easier to correctly compute the necessary expected values and to understand the
    process of making the decision. We will use our example of the real estate investor to demonstrate the
    fundamentals of decision tree analysis. The various decisions, probabilities, and outcomes of this
    example, initially presented in Table 12.7, are repeated in Table 12.10. The decision tree for this
    example is shown in Figure 12.2. The circles () and the square () in Figure 12.2 are referred to as
    nodes. The square is a decision node, and the branches emanating from a decision node reflect the
    alternative decisions

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