POM104 SEATWORK: DECISION TABLES & DECISION TREES

Decision Table:
You are the owner of Fishermans Friend, a seafood restaurant. The specialty of the house is a crab dish which is
sold in servings of one crab each, at P150 per serving. Because it is the specialty of the house, these crabs are
served only when they are fresh. If they remain unsold at the end of the day, they are sold to a neighboring second-
class restaurant at P50 per crab.

The supplier of crab sells them only in pairs, at P200 per pair, and he gives a P50 discount on each pair of
crabs after the first 10 pairs. A survey of your customer orders for this particular crab dish over the last 200 days
yielded the following results:
20 servings : 90 days
21 servings : 60 days
24 servings : 50 days

How many pairs of crabs should you order per day?

A. Decision-Making Based Upon Probabilities Alone

1. Maximum Probability
2. Expectation of the event
B. Decision-Making Based Upon Economic Consequences Alone
1. Maximax
2. Maximin
3. Minimax Regret
C. Decision-Making Based Upon Both Probabilities and Economic Consequences
1. Expected Value (EV)
2. Minimum Expected Opportunity Loss (EOL)
D. Expected Value of Perfect Information (EVPI) = EV w/ PI - highest EV possible
Decision Tree:
Sean Bond, chief corporate counsel for Triangle Electronics, has just learned that a competitor has filed two related
patent infringement suits against Triangle. The first of these will be heard in the Superior Court in 3 months, and
the second for 6 months thereafter. Sean estimates that the first trial will take no longer than 4 months to complete.
The options available to Triangle in each case are to settle out of court or to let the trial take place. Preparing to try
either suit alone will cost P7,500, but some of the legal preparations on the first suit will help on the second, so the
cost of preparing to try both suits will be only 12,000. Sean estimates that it will cost Triangle 75,000 to settle the
first suit out of court and 45,000 to settle the second.

Of course, settling out of court enables Triangle to avoid the trial preparation costs. If the suits go to trial and
Triangle wins, they will incur no further costs. However, Sean estimates that losing the first will result in
additional costs of P150,000, and losing the second will cost approximately P90,000. He feels that Triangle has a
60% chance of winning the first suit. The chance of winning the second suit depends on the resolution of the first:
40% if the first is settled out of court, 80% if the first is tried and won, and 10% if the first is tried and lost.
What decisions should Sean Bond make?
Homework:

You run a software publishing company and you have been offered the marketing rights to a new
spreadsheet program, code-named Lotus Eater, for the IBM-PS 80 computer. The fee for the marketing
rights is $2 million. The value of the marketing rights depends on the number of copies of the program
you will sell, which in turn depends on the number of IBM-PS 80 computers that will be sold and this
programs performance in comparison with competing spreadsheet programs. The possible sales of the
IBM-PS 80 can be characterized as low, medium, and high. Your subjective probabilities for these
outcomes are 0.8, 0.1 and 0.1, respectively. If Lotus Eater is the best spreadsheet program available for
this computer, you expect to make profits of $25 million if the machines sales are high, $10 million if the
machines sales are medium, and $1 million if the machines sales are low. If Lotus Eater is not the best
among the available spreadsheet programs, you expect to make profits of $5 million if the machines sales
are high, nothing if the machines sales are medium, and suffer a $6 million loss if the machines sales are
low. Your subjective probability that Lotus Eater will be the best is 0.7. Before deciding to pay the $2
million fee, you are looking into the possibility of obtaining more information about your potential
competitors. You can hire a panel of experts to test Lotus Eater and all of the available pre-release
versions of known competitors. From past experience, you estimate that the probability of a plus rating
from the panel given that Lotus Eater is the best program is 0.9. The probability of a plus rating from the
panel given that the Lotus Eater is not the best program is 0.2. The panel test costs $500,000. Will you
hire a panel of experts first? If no, will you go ahead and market Lotus Eater? Construct the decision tree
for this problem, indicating all probability values and terminal values. No need to perform the backward
induction process.