Solutions

3.1. Fundamental objectives are the essential reasons we care about a decision, whereas means objectives
are things we care about because they help us achieve the fundamental objectives. In the automotive safety
example, maximizing seat-belt use is a means objective because it helps to achieve the fundamental
objectives of minimizing lives lost and injuries. We try to measure achievement of fundamental objectives
because we want to know how a consequence stacks up in terms of the things we care about.
Separating means objectives from fundamental objectives is important in Chapter 3 if only to be sure
that we are clear on the fundamental objectives, so that we know what to measure. In Chapter 6 we will see
that the means-objectives network is fertile ground for creating new alternatives.
3.2. Answers will vary because different individuals have different objectives. Here is one possibility.
(Means objectives are indicated by italics.)

Best Apartment

Minimize
Travel time

To School To Shopping

Maximize
Ambiance

To Leisure -time
Activities

Maximize
Use of leisure
time

Alone FriendsNeighbors
Maximize
Discretionary $$

Centrally
located

Maximize
features (e.g.,
pool, sauna,
laundry)

Parking
at apartment
Maximize
windows, light

Minimize
Rent

3.3. A constructed scale for ambiance might be the following:

Best
--

--

-Worst

Many large windows. Unit is like new. Entrance and landscape are clean and inviting
with many plants and open areas.
Unit has excellent light into living areas, but bedrooms are poorly lit. Unit is clean and
maintained, but there is some evidence of wear. Entrance and landscaping includes some
plants and usable open areas but is not luxurious.
Unit has one large window that admits sufficient light to living room. Unit is reasonably
clean; a few defects in walls, woodwork, floors. Entrance is not inviting but does appear
safe. Landscaping is adequate with a few plants. Minimal open areas.
Unit has at least one window per room, but the windows are small. Considerable wear.
Entrance is dark. Landscaping is poor; few plants, and small open areas are not inviting.
Unit has few windows, is not especially clean. Carpet has stains, woodwork and walls are
marred. Entrance is dark and dreary, appears unsafe. Landscaping is poor or nonexistent;
no plants, no usable open areas.

3.4. It is reasonable in this situation to assume that the banks objective is to maximize its profit on the
loan, although there could be other objectives such as serving a particular clientele or gaining market share.
The main risk is whether the borrower will default on the loan, and the credit report serves as imperfect
information. Assuming that profit is the only objective, a simple influence diagram would be:

19

Credit
report

Default?

Make
Loan?

Profit

Note the node labeled Default. Some students may be tempted to call this node something like Credit
worthy? In fact, though, what matters to the bank is whether the money is paid back or not. A more
precise analysis would require the banker to consider the probability distribution for the amount paid back
(perhaps calculated as NPV for various possible cash flows).
Another question is whether the arrow from Default to Credit Report might not be better going the
other way. On one hand, it might be easier to think about the probability of default given a particular credit
report. But it might be more difficult to make judgments about the likelihood of a particular report without
conditioning first on whether the borrower defaults.
Also, note that the Credit Report node will probably have as its outcome some kind of summary
measure based on many credit characteristics reported by the credit bureau. It might have something like
ratings that bonds receive (AAA, AA, A, and so on). Arriving at a summary measure that passes the clarity
test could be difficult and certainly would be an important aspect of the problem.
If the diagram above seems incomplete, a Credit worthiness node could be included and connected
to both Credit report and Default:

Credit
worthiness

Credit
report

Default?

Make
Loan?

Profit

Both of these alternative influence diagrams are shown in the Excel file Problem 3.4.xls. Two different
types of arcs are used in the diagrams: 1) value only and 2) value and timing, and these are explained on
page 94 in the text. A value influence type influences the payoff calculation and a timing type exists if the
outcome precedes that calculation chronologically (or is known prior to the event).

20

3.5. This is a range-of-risk dilemma. Important components of profit include all of the different costs and
revenue, especially box-office receipts, royalties, licensing fees, foreign rights, and so on. Furthermore, the
definition of profits to pass the clarity test would require specification of a planning horizon. At the
specified time in the future, all costs and revenues would be combined to calculate the movies profits. In
its simplest form, the decision tree would be as drawn below. Of course, other pertinent chance nodes could
be included.

Revenue

Make
movie

Don't make movie

Profit = Revenue-Cost

Value of best
alternative

The revenue for the movie is drawn as a continuous uncertainty node in the above decision tree.
Continuous distributions can be handled two ways in PrecisionTree either with a discrete approximation
(see Chapter 8 in the text) or with simulation (see Chapter 11 in the text). This decision tree with a discrete
approximation of some sample revenue values is shown in the Excel file Problem 3.5.xls. A potentially
useful exercise is to have the students alter the sample values to see the effect on the model and specifically
the preferred decision.
3.6.
Strengths

Weaknesses

Influence Diagrams
Compact
Good for communication
Good for overview of large problems

Decision Trees
Display details
Flexible representation

Details suppressed

Become very messy

for large problems

Which should he use? I would certainly use influence diagrams first to present an overview. If details must
be discussed, a decision tree may work well for that.
3.7. This problem can be handled well with a simple decision tree and consequence matrix. See Chapter 4
for a discussion of symmetry in decision problems.

21

Best
Representation
Max
Communication
Overview
Influence
Diagram

Decision
Tree

Details
Details
hidden

Excellent for
large problems
Poor, due to
complexity

Details
displayed

Max flexibility
Best for symmetric
decision problems

Very flexible
for assymetric
decisions

3.8.

Win Senate
election?

Run for
Senate?
Run for Senate
Run for House

Yes
No

Outcome
Run for
Senate
House

Win Senate?
Yes
No
Yes
No

Outcome
US Senator
Lawyer
US Representative
US Representative

Note that the outcome of the Win Senate event is vacuous if the decision is made to run for the house.
Some students will want to include an arc from the decision to the chance node on the grounds that the
chance of winning the election depends on the choice made:

22

Win
election?

Run for
Senate?

Win
Lose

Outcome
Run for
Senate

Run for Senate

Run for House

Win Election?
Outcome
Yes
US Senator
No
Lawyer
Yes
US Representative

House

Note that it is not possible to lose the House election.

The arc is only to capture the asymmetry of the problem. To model asymmetries in an influence diagram,
PrecisionTree uses structure arcs. When a structural influence is desired, it is necessary to specify how the
predecessor node will affect the structure of the outcomes from the successor node. By using a structure
arc, if the decision is made not to run for the senate, the Win election? node is skipped. This influence
diagram is shown in the Excel file Problem 3.8.xls.
3.9. (Thanks to David Braden for this solution.) The following answers are based on the interpretation that
the suit will be ruined if it rains. They are a good first pass at the problem structure (but see below).
suit not ruined, plus a sense of relief
rain

no rain
take umbrella
suit not ruined, but inconvenience incurred
suit ruined
do not take umbrella
rain

no rain
suit not ruined

(A) Decision tree

23

Weather
Forecast

Rain

Take
Umbrella?

Take
Umbrella?

Satisfaction

(B) Basic Risky Decision

Rain

Satisfaction

(C) Imperfect Information

The Excel solution Problem 3.9.xls shows a realization of this problem assuming the cost of the suit is
$200, the cost of the inconvenience of carrying an umbrella when it is not raining is $20, the probability of
rain is 0.25, and the weather forecaster is 90% accurate.
Note that the wording of the problem indicates that the suit may be ruined if it rains. For example, the
degree of damage probably depends on the amount of rain that hits the suit, which is itself uncertain! The
following diagrams capture this uncertainty.
suit not ruined,
plus a sense of relief
rain
no rain
suit not ruined, but
inconvenience incurred

take umbrella
suit ruined

suit ruined

do not take umbrella

suit not
ruined
rain
no rain

suit not ruined, but some

effort spent to avoid ruining
the suit

suit not ruined

(A) Decision tree

Weather
Forecast

Rain

Take
Umbrella?

Satisfaction

(B) Basic Risky Decision

Take
Umbrella?

Ruin
Suit

24

Rain

Satisfaction

(C) Imperfect Information

Ruin
Suit

3.10. (Thanks to David Braden for this solution.)

The decision alternatives are (1) use the low-sodium saline solution, and (2) dont use the low-sodium
saline solution. The uncertain variables are: (1) The effect of the saline solution, consequences for which
are patient survival or death; (2) Possibility of court-martial if the saline solution is used and the patent
dies. The possible consequences are court-martial or no court-martial. The decision tree:
patient dead

do not use
saline solution
patient
saved

patient survives and the

use of saline solution justified
for other patients

use saline
solution

patient dead and

doctors suffer

patient dead
court-martial

no court-martial

patient dead

This decision tree is drawn in the Excel file Problem 3.10.xls.

3.11. a.

Sunny

Best

Weather
Rainy

Outdoors

Indoors
Party
decision

Terrible

Good

Satisfaction
No party

Bad

This influence diagram is drawn in the Excel file Problem 3.11.xls with some samp le values assumed (on
a utility scale, a sunny party outside is worth 100, an indoors party is worth 80, no party is worth 20, a party
outside in the rain is worth 0, and the probability of rain is 0.3). A structure only arc is added in the file
between party decision and weather to include the asymmetries to skip the weather uncertainty if the
decision is made to have no party or have one indoors.
The second worksheet in the file shows the default decision tree created by the Convert to Tree button on
the influence diagram settings dialog box. (Click on the name of the influence diagram Problem 3.11a to
access the influence diagram settings. The Convert to Decision Tree button creates a decision tree from the
current influence diagram. This can be used to check the model specified by an influence diagram to insure
that the specified relationships and chronological ordering of nodes are correct. Conversion to a decision
tree also shows the impacts of any Bayesian revisions made between nodes in the influence diagram.

25

Once a model described with an influence diagram is converted to decision tree, it may be further edited
and enhanced in decision tree format. However, any edits made to the model in decision tree format will
not be reflected in the original influence diagram.
b. The arrow points from Weather to Forecast because we can easily think about the chances
associated with the weather and then the chances associated with the forecast, given the weather. That is, if
the weather really will be sunny, what are the chances that the forecaster will predict sunny weather? (Of
course, it is also possible to draw the arrow in the other direction. However, doing so suggests that it is easy
to assess the chances associated with the different forecasts, regardless of the weather. Such an assessment
can be hard to make, though; most people find the former approach easier to deal with.)

Forecast

Weather

Party
decision

Satisfaction

Sunny
Rainy

Outdoors

Indoors
Forecast
= Sunny

Terrible

Good

No party

Sunny

Forecast
= Rainy

Best

Rainy

Outdoors

Indoors

No party

Bad

Best
Terrible

Good

Bad

The influence diagram including the weather forecast is shown in the third worksheet and the associated
default decision tree created by the Convert to Tree function is shown in the fourth worksheet.
Additionally, we assumed that the weather forecaster is 90% accurate.

26

3.12. The outcome Cloudy, defined as fully overcast and no blue sky, might be a useful distinction,
because such an evening outdoors would not be as nice for most parties as a partly-cloudy sky. Actually,
defining Cloudy to pass the clarity test is a difficult task. A possible definition is At least 90% of the sky
is cloud-covered for at least 90% of the time.
The NWS definition of rain is probably not as useful as one which would focus on whether the guests
are forced indoors. Rain could come as a dreary drizzle, thunderstorm, or a light shower, for instance. The
drizzle and the thunderstorm would no doubt force the guests inside, but the shower might not.
One possibility would be to create a constructed scale that measures the quality of the weather in terms
that are appropriate for the party context. Here are some possible levels:
(Best)
---(Worst)

Clear or partly cloudy. Light breeze. No precipitation.

Cloudy and humid. No precipitation.
Thunderclouds. Heavy downpour just before the party.
Cloudy and light winds (gusts to 15mph). Showers off and on.
Overcast. Heavy continual rain.

3.13.

Change product
Engineer
says Fix #3.

Replace
#3

Behind schedule

#3 Defective
#3 not
defective

Behind scedule,costly

Change product

Behind schedule

Engineer says
#3 OK.
Replace
#3

On schedule, costly

#3 Defective

On schedule, costly

#3 not
defective

Behind scedule,costly

This decision tree is drawn in the Excel file Problem 3.13.xls.

3.14.

Forecast

Hurricane
Path

Safety
Decision

Evacuation
Cost

27

Consequence

Note that Evacuation Cost is high or low depending only on the evacuation decision. Thus, there is no arc
from Hurricane Path to Evacuation Cost.
This influence diagram is drawn in the Excel file Problem 3.14.xls. Since PrecisionTree allows only one
payoff node per influence diagram, the Safety and Evaluation Cost nodes are represented by
calculation nodes. A calculation node (represented by a rounded blue rectangle) takes the results from
predecessor nodes and combines them using calculations to generate new values. These nodes can be used
to score how each decision either maximizes safety or minimizes cost.
The constructed scale for safety is meant to describe conditions during a hurricane. Issues that should
be considered are winds, rain, waves due to the hurricanes storm surge, and especially the damage to
buildings that these conditions can create. Here is a possible constructed scale:
(Best)

Windy, heavy rain, and high waves, but little or no damage to property or infrastructure.
After the storm passes there is little to do beyond cleaning up a little debris.
-Rain causes minor flooding. Isolated instances of property damage, primarily due to
window breakage. For people who stay inside a strong building during the storm, risk is
minimal. Brief interruption of power service.
-Flooding due to rain and storm surge. Buildings within 100 feet of shore sustain heavy
damage. Wind strong enough to break many windows, but structural collapse rarely
occurs. Power service interrupted for at least a day following the storm.
-Flooding of roads and neighborhoods in the storms path causes areas with high property
damage. Many roofs are severely damaged, and several poorly constructed buildings
collapse altogether. Both electrical power and water service are interrupted for at least a
day following the storm.
(Worst) Winds destroy many roofs and buildings, putting occupants at high risk of injury or
death. Extensive flooding in the storms path. Water and electrical service are interrupted
for several days after the storm. Structural collapse of older wood-frame buildings occurs
throughout the region, putting occupants at high risk.
3.15. Answers to this question will depend largely on individual preferences, although there are some
typical responses. Some fundamental objectives: improve ones quality of life by making better decisions,
help others make better decisions, improve career, graduate from college, improve ones GPA (for one who
is motivated by grades). Some means objectives: satisfy a requirement for a major, improve a GPA (to have
better job opportunities), satisfy a prerequisite for another course or for graduate school. Note that making
better decisions is itself best viewed as a means objective because it can provide ways to improve ones
life. Only a very few people (academics and textbook writers, for example), would find the study of
decision analysis to be its own reward!
The second set of questions relates to the design of the course and whether it is possible to modify the
course so that it can better suit the students objectives. Although I do not want to promote classroom
chaos, this is a valuable exercise for both students and instructor to go through together. (And the earlier in
the term, the better!) Look at the means objectives, and try to elaborate the means objectives as much as
possible. For example, if a class is primarily taking the course to satisfy a major requirement, it might make
sense to find ways to make the course relate as much as possible to the students major fields of study.
3.16. The main source of uncertainty is whether he will win the election. Conflicting objectives include
reducing his debts versus becoming President. Of course, many different structures are possible, depending
on exactly what elements of the decision are taken into account. Here are some possibilities:

28

Win election

Very large debts,

President

Lose election

Very large debts,

not President

Win nomination

Run
Lose nomination

Larger debts,
not President

Current debts,
not President

Drop out

Run or
Drop out

Debts

Satisfaction
Primary
election
results

Election
results

Political
office

This decision tree and corresponding influence diagram are drawn in the Excel file Problem 3.16.xls.
3.17. Here are my fundamental-objectives hierarchy and means-objective network (italics) in the context of
purchasing or building a telescope. The diagram does provide insight! For example, many astronomers
focus (so to speak) on image quality, and so there is a tendency to overemphasize aperture and quality of
eyepieces. But for me, an important issue is enjoying myself as much as possible, and that can mean taking
the telescope out of the city. All of the means objectives related to Maximize enjoyment of viewing
sessions (which is intended to capture aspects other than enjoying the quality of the images viewed) push
me toward a smaller, lighter, less expensive telescope. Thus, it is arguable that the basic question I must ask
is whether I just want to get out at night and enjoy seeing a few interesting sights, or whether my interest
really is in seeing very faint objects with as much clarity as possible.
Of course, the creative solution would be to find an inexpensive and highly transportable telescope
with large aperture, excellent optics, and very stable mount. Unfortunately, such a telescope doesnt exist;
all of the desired physical features would lead to a very expensive telescope!

29

Best Telescope

Maximize image
clarity
Maximize
brightness

Max
aperture

Maximize
image
defnition

Max quality
of optics

Maximize
enjoyment of
viewing sessions

Maximize quality
of astrophotography

Maximize
stability

Max quality
of tracking device

Max
stability of
mount

Max additional
viewing accessories
Min light
pollution in sky
Min cost
of telescope

Max visits to
dark-sky site

Min
total weight

Max
transportability

Minimize
telescope size

3.18. Objectives are, of course, a matter of personal preferences, and so answers will vary considerably.
a. Here is an objectives hierarchy for the decision context of going out to dinner:
Time

Driving time

Minimize
cost

Ordering/serving

Dollar cost
Atmosphere
Maximize
experience

Location
Menu
Quality of food

30

b. A simple hierarchy for deciding from among different trips:

Company (friends)
Maximize
experience

Learning
Relax
Time

Preparation
Minimize
cost

Expense
Travel cost

Some means objectives might be going to a particular kind of resort; maximizing time spent shopping,
golfing, or on the beach; maximizing nights spent in youth hostels; using a travel agent (to reduce time
spent in preparation); maximizing time in a foreign country (to maximize language learning, for example).
c. Here is a possible fundamental-objectives hierarchy for choosing a childs name:
Similarity of name
Maximize
family ties

Closeness of namesake
by child

Ease of
use/learning

by childs playmates
by relatives
Nicknames

Minimize negative
potential
Teasing by friends

3.19. Responding to this question requires considerable introspection and can be very troubling for many
students. At the same time, it can be very enlightening. I have had students face up to these issues in
analyzing important personal decisions such as where to relocate after graduation, whether to make (or
accept) a marriage proposal, or whether to have children. The question, What is important in my life?
must be asked and, if answered clearly, can provide the individual with important insight and guidance.
3.20. a. These influence diagrams and decision trees are drawn in the Excel file Problem 3.20.xls.

Surgery
results

Have
surgery

Recover
fully

Die
Have
surgery?

Quality
of life

Dont
have surgery

31

Long, healthy
life

Death
Progressive
debilitation

b.

Surgery
results

Quality
of life

Have
surgery?

Recover
fully
Have
surgery

Complications

Long,
healthy
life

Complications
Die

Dont
have surgery

Death
Progressive
debilitation

Full recovery

Long healthy life after

difficult treatment

Partial recovery

Invalid after difficult

treatment

Death

Death after difficult

treatment

Given the possibility of complications and eventual consequences, the surgery looks considerably less
appealing.
c. Defining this scale is a personal matter, but it must capture important aspects of what life would be like
in case complications arise. Here is one possible scale:
(Best)
--

No complications. Normal, healthy life.

Slight complications lead to minor health annoyances, need for medication, frequent
visits. Little or no pain experienced. Able to engage in most age-appropriate activities.
-Recovery from surgery requires more than two weeks of convalescence. Pain is intense
but intermittent. Need for medication is constant after recovery. Unable to engage in all
age-appropriate activities.
-Recovery requires over a month. Chronic pain and constant need for medication.
Confined to wheelchair 50% of the time.
(Worst) Complete invalid for remainder of life. Restricted to bed and wheelchair. Constant pain,
sometimes intense. Medication schedule complicated and occasionally overwhelming.
3.21. This question follows up on the personal decision situation that was identified in problem 1.9.

32

3.22 This decision tree is drawn in the Excel file Problem 3.22.xls.

Not to be
(commit suicide)

To be
(continue to live)

What dreams may

come (What comes
after death?)

Bear fardels
(burdens of life)

3.23. This decision tree is drawn in the Excel file Problem 3.23.xls.

Aircraft hostile

Crew safe

Aircraft not
hostile

Crew safe
Civilians killed

Shoot

Aircraft hostile
Don't shoot
Aircraft not
hostile

Harm to
crew
Crew safe
Civilians safe

Rogerss most crucial objectives in this situation are to save lives, those of his crew and of any
civilians who are not involved. It is not unreasonable to consider objectives of saving his ship or improving
the relationship with Iran, but in the heat of action, these were probably not high on Rogers list.
The risk that Rogers faces is that the blip on the radar screen may not represent a hostile aircraft. The
main trade-off, of course, is the risk to his crew versus possibly killing innocent civilians.
As usual, there are a lot of ways this decision tree could be made more elaborate. For example, a
Wait alternative might be included. The tree above assumes that if the decision is to shoot, the incoming
aircraft would be hit (generally a safe assump tion these days), but one might want to include the possibility
of missing.

33

3.24. This is a straightforward calculation of NPV. Assuming that all the cash flows happen at the ends of
the years, the following table shows the cash flows:
Cash
Flows
Year
0
1
2
3
4
5
6
7
8
9

Stop

Continue Continue
No Patent
Patent
License

0
0
0
0
0
0
0
0
0
0

0
-2
0
0
0
0
0
0
0
0

0
-2
0
5
5
5
5
5
0
0

Continue Continue
Patent
Patent
Develop
Develop
Dem. High Dem. Med
0
0
-2
-2
0
0
-5
-5
-5
-5
11
6.6
11
6.6
11
6.6
11
6.6
11
6.6

Continue
Patent
Develop
Dem. Low
0
-2
0
-5
-5
3
3
3
3
3

Present values are calculated by applying the appropriate discount rate to each cash flow; the discount rate
1
is
for the cash flows in year i. Finally, NPV is the sum of the present values. Also, the NPV function
1.15i
in Excel can be used for the calculations as shown in the Excel file Problem 3.24.xls.
Present
Values
Year
0
1
2
3
4
5
6
7
8
9
NPV

Stop Continue
No Patent
Dis count
Factor
1
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843

Continue
Patent
License

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0.00
-1.74
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0.00
-1.74
0.00
3.29
2.86
2.49
2.16
1.88
0.00
0.00

0.00

-1.74

10.93

Continue Continue
Patent
Patent
Develop
Develop
Dem. High Dem. Med
0.00
0.00
-1.74
-1.74
0.00
0.00
-3.29
-3.29
-2.86
-2.86
5.47
3.28
4.76
2.85
4.14
2.48
3.60
2.16
3.13
1.88
13.20

4.76

Continue
Patent
Develop
Dem. Low
0.00
-1.74
0.00
-3.29
-2.86
1.49
1.30
1.13
0.98
0.85
-2.14

In file Problem 3.24.xls, the decision tree references the NPV calculations to demonstrate the process of
choosing to continue or stop development. The ability to build these trees in Excel and reference cells as
done in this problem makes this a powerful program. The payoff for each branch of the tree is a formula
that corresponds to the correct cell in the NPV calculations worksheet.
Alternative assumptions can be made about the timing of the cash flows. For example, it would not be
unreasonable to believe that the expenses must be paid at the beginning of the year and that revenue arrives
at the end of the year. The most realistic scenario, however, is that all cash flows are evenly spread out over
the year for which they are specified.

34

3.25. This decision tree is relatively complex compared to the ones that we have seen so far. Buying the
new car does not involve any risk. However, the used car has an uncertainty each year for the next three
years. The decision tree is shown below. Note that it is also possible to calculate the NPVs for the ends of
the branches; the natural interest rate to use would be 10%, although it would be best to use a rate that
reflects what you could earn in another investment. This decision tree representation does not discount the
values.

Down
Payment
New Car -5500

Purchase

Maintenance and loan payments

Year 1
Year 2
Year 3
-2522.20

-2722.20

Repairs
Year 1

Repairs
Year 2

-650
(0.2)

Used Car -5500

-1650
(0.6)

-2650
(0.2)

-2722.20

Repairs
Year 3

Salvage

Net
Value

3626

-9841

Salvage

Net
Value

-700
(0.2)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-5350
-6350
-7350

-1700
(0.6)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-6350
-7350
-8350

-2700
(0.2)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-7350
-8350
-9350

-700
(0.2)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-6350
-7350
-8350

-1700
(0.6)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-7350
-8350
-9350

-2700
(0.2)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-8350
-9350
-10350

-700
(0.2)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-7350
-8350
-9350

-1700
(0.6)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-8350
-9350
-10350

-2700
(0.2)

-500 (0.2)
-1500 (0.6)
-2500 (0.2)

2000
2000
2000

-9350
-10350
-11350

Two Excel files are included for this problem: one with discounting (Problem 3.25.xls) and one without
discounting that corresponds to the above decision tree (Problem 3.25 alt.xls). The decision trees are

35

implemented with a payoff formula. The payoff formula is specified in the decision tree settings dialog
box. The formula sums the values (costs) incurred through each path of the decision tree, and in Problem
3.25.xls discounts the values appropriately according to the chosen interest rate. Changing the interest
rate in cell B4 does not automatically update the formula calculations. In order to update the decision tree
calculations, you need to open the decision tree settings dialog box.
3.26a. The influence diagram from Exercise 3.11(a) is shown here drawn in PrecisionTree.

Weather

Party decision
Satisfaction

In order for the Convert To Tree button to automatically adjust for the asymmetries, a structure arc is
needed from Party Decision to Weather (represented by the dotted arrow). This influence diagram and
the corresponding converted decision tree are shown in the first two worksheets in the Excel file Problem
3.26.xls. Some assumed values for outcomes and probabilities are shown in the converted decision tree.
70.0%

Sunny

0
FALSE

Outdoors

Weather

70
Rainy

Converted Problem 3.26 (a)

0
100

30.0%

Party decision
80
Indoors
No party

TRUE

80

FALSE

20

b. Adding the arrow from Weather to Party Decision means that the information regarding the weather
is known before the time of the decision. Therefore, in the Converted Decision Tree, the Weather chance
events will appear in the tree prior to the Party Decision.

Weather

Party Decision

Satisfaction

36

TRUE
100

Outdoors
70.0%

Sunny

0.7
100

Party Decision

100
Indoors

FALSE

80

80

FALSE

20

20

FALSE
0

0
0

Indoors

TRUE
80

0.3
80

No party

FALSE

20

20

No party
Weather

Converted Problem 3.26 (b)

94
Outdoors
30.0%

Rainy

Party Decision

80

c.
Weather

Forecast

Party decision

Satisfaction

If the arrow went from "Party" to "Forecast", then you would have to make the party decision before you
got the forecast. If an arrow started at "Forecast" and went to "Weather", we would be stating that
somehow the forecast influences the weather.
Sunny
Outdoors

TRUE

95.5%

0.63

100

4.5%

0.03

Weather

95.455
Rainy

0
"Sunny" forecast 66.0%
0

Converted Problem 3.26 (c)

Party decision
95.455
Indoors

FALSE

No party

0
FALSE

80
0

20

Forecast
90.2
20.6%

Sunny

0
Outdoors

FALSE

Weather

20.588
Rainy

"Rainy" forecast

34.0%

Party decision

80
Indoors
No party

TRUE
0
FALSE
0

37

0
100

0.34
80
0
20

79.4%