Example of a Decision Tree

Aggressive

Schedule

Conservative

Schedule

Uncertain

Outcome

Probability (P)

P = .20

times

Outcome =

Expected

Value (EV)

x + $100,000 = + $20,000

• EV of result = Outcome x Probability of outcome

x - $20,000 = - $16,000

P = .80

EV = $4,000

• EV of decision = sum of all outcomes stemming from decision

x - $20,000 = - $6,000

Uncertain

Outcome

P = .30

x + $10,000 = + $7,000

P = .70

EV = $1,000

• Hence, Aggressive schedule ($4000) is better than Conservative ($1000)

Sum