Introduction to PrecisionTree 5.0
Erik Westwig
Palisade Corporation
Overview of PrecisionTree
„
Decision Analysis Add-in for Microsoft Excel
„
Analysis of
„
„
„
Decision Trees
Influence Diagrams
Analysis Capabilities
„
„
„
„
Risk Profiles
Policy Suggestion
Sensitivity Analysis
Integration with Other Excel and Palisade Tools
A Simple Decision Tree
Outcome A1
50.0%
$100.00
Choice A
FALSE
Chance
-$10.00
$140.00
Outcome A2
50.0%
$200.00
Simple Model
0.0%
$90.00
0.0%
$190.00
Decision
$145.00
Outcome B1
Choice B
TRUE
Chance
-$15.00
$145.00
Outcome B2
50.0%
50.0%
-$50.00
-$65.00
50.0%
50.0%
$370.00
$355.00
A Not So Simple Decision Tree
Dry
FALSE
Drill
73.0%
0.0%
$0.00
-$80,000.00
Oil Found
-$70,000.00
-$40,100.00
22.0%
Wet
$120,000.00
5.0%
Soaking
$270,000.00
41.0%
No Structure
-$10,000.00
Don't Drill
TRUE
TRUE
41.0%
$0.00
-$10,000.00
Test Results
$22,587.00
-$10,000.00
Dry
TRUE
Drill
43.0%
15.05%
$0.00
-$80,000.00
Oil Found
-$70,000.00
$22,900.00
34.0%
Wet
$120,000.00
23.0%
Soaking
$270,000.00
35.0%
Open Structure
FALSE
0.0%
$0.00
-$10,000.00
Dry
TRUE
Drill
-$70,000.00
21.0%
5.04%
$0.00
-$80,000.00
Oil Found
$77,800.00
37.0%
Wet
$120,000.00
42.0%
Soaking
$270,000.00
24.0%
Drill Decision
$0.00
$77,800.00
FALSE
Don't Drill
$0.00
0.0%
-$10,000.00
Test Decision
$22,587.00
Dry
TRUE
Drill
-$70,000.00
50.0%
0.0%
$0.00
-$70,000.00
Oil Found
$20,000.00
30.0%
Wet
$120,000.00
Soaking
20.0%
$270,000.00
Don't Test
FALSE
$0.00
Drill Decision
$20,000.00
Don't Drill
8.05%
$190,000.00
$22,900.00
Don't Drill
Closed Structure
11.9%
$40,000.00
Drill Decision
$0.00
Oil
0.0%
$190,000.00
Drill Decision
$0.00
Test
0.0%
$40,000.00
FALSE
0.0%
$0.00
$0.00
0.0%
$50,000.00
0.0%
$200,000.00
8.88%
$40,000.00
10.08%
$190,000.00
Decision Tree Calculation
„
Calculate All End-Node Path Values
„
Apply Utility Function (If Specified)
„
“Rollback” the Tree in Reverse
Simplify Chance Nodes
Make Optimal Choices
Repeat Until Done
Model Analysis
Risk Profiles
A Risk Profile is a discrete probability
distribution, showing each possible outcome of
the model, and its associated probability.
Model Analysis
Policy Suggestion
A Policy Suggestion Report identifies the optimum
choices for each decision in a model.
Model Analysis
Sensitivity Analysis
A Sensitivity Analysis shows how changing one or
more of the underlying assumptions of the
model affects the outcome.
Payoff Calculation Methods
„
Cumulative
„
Formula
„
Linked Spreadsheet
„
VBA Macro
(Mis)Analysis Using Expected Values
Outcome A
50.0%
$100.00
Choice A
FALSE
$0.00
$100.00
Chance #1
$150.00
Outcome B
50.0%
$200.00
New Tree
0.0%
0.0%
$200.00
Decision #1
$244.75
Outcome B
99.9%
$250.00
Choice B
TRUE
Chance #2
$0.00
$244.75
Outcome C
0.1%
-$5,000.00
99.9%
$250.00
0.1%
-$5,000.00
Utility Functions
Use a Utility Function to recognize that the value of
money is not linear.
Stupid Example:
Compare the relative attitudes of Erik Westwig to
Bill Gates concerning a venture worth $1000.
$3,500.00
$3,000.00
$2,500.00
$2,000.00
$1,500.00
$1,000.00
$500.00
-1.5
$0.00
-$500.00
-$1,000.00
-$1,500.00
Exponential Utility Function
1.5
1
0.5
R = 2000
0
-0.5
-1
R = 1000
-2
Analysis with Exponential Utility R=1000
Outcome A
50.0%
$100.00
Choice A
TRUE
Chance #1
$0.00
0.138215914
Outcome B
50.0%
$200.00
New Tree (2)
50.0%
0.095162582
50.0%
0.181269247
Decision #1
0.138215914
Outcome B
99.9%
$250.00
Choice B
FALSE
$0.00
0.0%
0.221199217
Chance #2
0.073564859
Outcome C
0.1%
-$5,000.00
0.0%
-147.4131591
Analysis with Exponential Utility Function R=1000
(Certainty Equivalents)
Outcome A
50.0%
$100.00
Choice A
TRUE
Chance #1
$0.00
$148.75
Outcome B
50.0%
$200.00
New Tree (3)
50.0%
$100.00
50.0%
$200.00
Decision #1
$148.75
Outcome B
99.9%
$250.00
Choice B
FALSE
$0.00
0.0%
$250.00
Chance #2
$76.41
Outcome C
0.1%
-$5,000.00
0.0%
-$5,000.00
PrecisionTree and VBA
PrecisionTree 5.0 has a new programmatical
interface which can be called easily from within
Excel.
„
Calculation of Models using VBA
„
VBA Automation
Influence Diagrams
„
Advantages
Compact
„ Automatic Bayesian Revision
„
„
Disadvantages
Difficult to Understand
„ Hard to Build Asymmetric Models
„
A Example Influence Diagram
PrecisionTree
Oil Diagram
Expected Value
Std. Deviation
Minimum
Maximum
$128,000.00
$107,373.18
-$43,000.00
$227,000.00
Payoff
Drill Decision
Amount of Oil
Test Decision
Test Results