• Multi-stage decision problems

• Many problems involve a series of decisions

Multi-stage
Decision • Example

• Should you go out to dinner tonight?

Problems
• If so,

• How much will you spend?

• Where will you go?

• How will you get there?

• Multistage decisions can be analyzed using

decision trees
Multi-Stage Decision Example: COM-TECH
• Steve Hinton, owner of COM-TECH, is considering whether to apply for a $85,000
OSHA research grant for using wireless communications technology to enhance safety
in the coal industry.
• Steve would spend approximately $5,000 preparing the grant proposal and estimates a
50-50 chance of receiving the grant.
• If awarded the grant, Steve would need to decide whether to use microwave, cellular,
or infrared communications technology.

▪ Steve would need to acquire some new equipment depending

on which technology is used…
Technology Equipment Cost
Microwave $4,000
Cellular $5,000
Infrared $4,000
continued...
COM-TECH (continued)
▪ Steve knows he will also spend money in R&D, but he doesn’t know exactly what the
R&D costs will be. Steve estimates the following best case and worst-case R&D costs
and probabilities, based on his expertise in each area.

Best Case Worst Case

Cost Prob. Cost Prob.
Microwave $30,000 0.4 $60,000 0.6
Cellular $40,000 0.8 $70,000 0.2
Infrared $40,000 0.9 $80,000 0.1

▪ Steve needs to synthesize all the factors in this problem to decide whether to
submit a grant proposal to OSHA.
Sequencing the decisions and events

1. Submit proposal
1. Receive Grant
1. Microwave→(High R & D or Low R & D)
2. Cellular →(High R & D or Low R & D)
3. Infrared →(High R & D or Low R & D)
2. Do not receive grant

2. Do nothing
 0.400
Low
-₹30,000 ₹46,000
* R&D
Microwave
-₹4,000 ₹28,000
0.600
High
-₹60,000 ₹16,000
0.500 Choice of technology
Awarded grant
₹85,000 ₹32,000
0.800
Low
-₹40,000 ₹35,000
* R&D
Cellular
-₹5,000 ₹29,000
0.200
High
-₹70,000 ₹5,000
0.900
Low
-₹40,000 ₹36,000
Best R&D
Infrared
-₹4,000 ₹32,000
0.100
High
-₹80,000 -₹4,000
Best Outcome of grant
Submit
-₹5,000 ₹13,500
0.500
Rejected proposal
₹0 -₹5,000
Submit a research proposal?
₹13,500
*
Do not submit
₹0 ₹0