Create and evaluate a decision tree for decision analysis
To create and evaluate a decision tree first (1) enter the structure of the tree in the input editor or (2) load a tree structure from a file. When you first navigate to the Model > Decision analysis tab you will see an example tree structure. This structure is based on an example by Christop Glur, the developer of the data.tree library.
To enter a new structure, start by providing a name for the tree and enter a label in the input box next to the
Calculate button. In the example below the name for the decision tree is entered as follow:
name: Sign contract. The next step is to indicate the type of the first node. Options are
type: decision or
type: chance. Note that we are skipping
variables for now but will return to this section below.
In the provided example, the first node is a decision node. The decision maker has to decide to
Sign with Movie Company or
Sign with TV Network. The first option leads to a chance node with probabilities and payoffs. The second has a fixed payoff.
Note: Indentation is critically important when defining a tree structure. Use tabs to create branches as shown in the example. Names for branches must be followed by a
:and information about the branch must be indented using the
After providing the name for the decision
Sign with Movie Company, the next line must be indented using the
tab key. In the example, the next line starts the description of a chance node (
type: chance). There are 3 possibilities in the example: (1)
Small Box Office, (2)
Medium Box Office, and (3)
Large Box Office, each with a probability and a payoff. These are end-points for one branch of the tree and are often referred to as
terminal nodes or
leaves. All endpoints must have a
Note: Probabilities for a chance node should sum to 1 and all probabilities must be smaller than 1.
A decision can also be assigned a
cost. For example, if we decide to sign with the movie studio we may incur a cost of $5,000 for legal support. Assume the contract with the TV network is simpler and does not reguire legal assistance. Note that using
costs is optional. In the example we could also subtract $5,000 from each of the possible box-office payoffs.
If some values in the tree are relate or repeated it can be useful to use a
variables section. Here you can assign labels to values and formulas. In the
Sign contract example only one variable is created (i.e.,
legal fees). The Sensitivity tab requires that a variables section is included in the tree structure.
name: My tree)
variablessection or a node defintion (i.e., type: chance or type: decision)
:. For node names the
:ends the line. For all other lines it assigns a value. Specically, it assigns a name (e.g.,
name: My tree), a node type (e.g.,
type: decision), a variable (e.g.,
legal fees: 5000), or a number (e.g.,
p: 0.4) and a payoff
After specifying the tree structure in the editor, press the
Calculate button to see the
Final decision tree in text format on the right side of the screen (see screen shot below). The initial tree simply shows the tree structure that was specified, together with the node types, probabilities, costs, and payoffs. The final tree shows the optimal decision strategy determined by
folding-back the tree. In this case, the optimal decision is to
Sign with Movie Company because this decision has a higher Expected Monetary Value (EMV).
For a visual representation of the decision tree open the Plot tab. If you already clicked the
Calculate button in the Model tab you will see a graph of the
Initial decision tree (see screen shot below). Decision nodes are shown in green and chance nodes in orange. If the tree does not look as you intended/expected, return to the Model tab and edit the tree structure.
Final graph shows the optimal decision determined by
folding-back the tree. The optimal decision is to
Sign with Movie Company because this decision has a higher Expected Monetary Value. Note that the optimal decision at each decision node is shown by a thicker line connecting to the nodes.
The EMV for the
Sign with TV Network is $900,000. The expected box office revenue following a decision to
Sign with Movie Company is:
\[ 0.3 \times 200,000 + 0.6 \times 1,000,000 + 0.1 \times 3000,000 - 5,000 = 955,000 \]
The EMV from signing with the movie company is however \(960,000 - 5,000 = 955,000\). Hover the cursor over the chance node shown on screen to see a
tooltip that shows the calculation. To highlight that a
cost was specified the chance node in the figure has a dashed outer line.
Sign contract example it is clear that
Sign with Movie Company is the prefered option. However, suppose the legal fees associated with this option were $10,000, or $30,000, would we still choose the same option? This is where the Sensitivity tab is useful. Here we can evaluate how decisions (e.g.,
Sign with Movie Company and
Sign with TV Network) would change if the legal fee changes. Enter 0 as the
Min value, 80000 as the
Max value, 10000 as the
Step size, and then press the icon. After pressing
Evaluate sensitivty a graph will be shown that illustrates how payoffs for the decisions change. Notice that for legal fees higher than $60,000
Sign with TV Network produces the highest EMV.
Useful keyboard short-cuts:
You can also (un)fold lines using the small triangles next to the line numbers.
For additional shortcuts see: