Decision Trees and Expected Value

This tutorial explains how to construct a decision tree and calculate the expected value of sample information (EVSI) to make informed investment decisions. It covers evaluating investment options like stocks, mutual funds, and bonds, and discusses the role of an economic consultant in providing additional information. The tutorial also explains how to calculate probabilities, posterior probabilities, and expected values with and without sample information. Finally, it demonstrates how to use EVSI to determine the best decision strategy based on the cost of hiring a consultant.

What is the main focus of this decision tree tutorial?

• Economic Forecasting

• Investment Strategies

• Decision Tree for Risk Management

• Expected Value of Sample Information

What is the purpose of constructing a decision tree in this tutorial?

• To calculate Expected Value of Sample Information

• To evaluate company performance

• To determine stock prices

• To analyze market trends

Which investment option has the highest expected value according to the payoff table?

• Real Estate

• Mutual Funds

• Stocks

• Bonds

What additional decision situation is introduced with the economic consultant?

• Whether to invest in real estate

• Whether to hire the consultant or not

• Whether to diversify investments

• Whether to increase stock holdings

What is the probability of the consultant giving a positive report?

• 0.75

• 0.25

• 0.44

• 0.56

What is the expected value for node 1 if the report is positive?

• 27.0268

• 35.97

• 18.2

• 20

How is the Expected Value of Sample Information (EVSI) calculated?

• EV without SI - EV with SI

• EV with SI + EV without SI

• EV with SI * EV without SI

• EV with SI - EV without SI

What should be the decision strategy if the consultant's fee is higher than the EVSI?

• Hire the consultant

• Invest in Bonds

• Do not hire the consultant

• Invest in Mutual Funds

What is the best decision strategy if the consultant's fee is less than the EVSI?

• Hire the consultant and invest in Stocks if the report is positive

• Do not hire the consultant

• Invest in Mutual Funds

• Hire the consultant and invest in Bonds if the report is positive