Bayes Rule and Decision Tree

Penelitian Operasional 3 (ISE – 183101)

Reference:
Winston, W.L. & Goldberg, J.B. (2004). Operations research: applications and algorithms (Vol 4).
BelmonteCalif:Thomson/Brooks/Cole
Chapter 13.5 & 12.4
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Outline

Decision Tree excercise

Review Bayes Rule

Bayes Rule and Decision Tree

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Exercise

Oilco must determine whether or not to drill for oil in the South China Sea. It
costs $100,000, and if oil is found, the value is estimated to be $600,000. At
present, Oilco believes there is a 45% chance that the field contains oil.
Before drilling, Oilco can hire (for $10,000) a geologist to obtain more
information about the likelihood that the field will contain oil. There is a 50%
chance that the geologist will issue a favorable report and a 50% chance of an
unfavorable report.
Given a favorable report, there is an 80% chance that the field contains oil. Given
an unfavorable report, there is a 10% chance that the field contains oil.

Determine Oilco’s optimal course of action. Also determine EVSI and EVPI.
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 $ -10,000
At each event fork, we Don’t Drill

calculate the expected

reward/payoff and enter Oil 80% $ 490,000
it in Drill
$ 370,000
Fav 50% ER = 0.8*(490,000) + 0.2*(-110,000) = $370,000.

No Oil 20% $ -110,000

Don’t Drill $ -10,000

Hire Geologist
Not Fav 50%
Oil 10% $ 490,000
- $ 50,000
Drill
ER = 0.1*(490,000) + 0.9*(-110,000) = - $50,000.

No Oil 90% $ -110,000

$ 500,000
$ 170,000 Oil 45%

Don’t Hire Drill ER = 0.45*(500,000) + 0.55*(-100,000) = $170,000.

Geologist
No Oil 55% $ -100,000

Don’t Drill $0
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 At each decision fork, the Don’t Drill $ -10,000
decision that maximizes $ 370,000

the reward denoted by ‖ . $ 490,000

Oil 80%
Enter the ER associated ‖ $ 370,000
Drill
with that decision in . Fav 50%

ER = 0.5*(370,000) + 0.5*(-10,000) = $180,000. No Oil 20% $ -110,000

$ 180,000 Don’t Drill $ -10,000

- $ 10,000
Hire Geologist
‖
Not Fav 50%
Oil 10% $ 490,000
‖ - $ 50,000
Drill

$ 180,000 No Oil 90% $ -110,000

Oilco’s optimal decision is hire $ 500,000

$ 170,000 Oil 45%
the geologist and act optimally
based on the report. Don’t Hire Drill
If report favorable, Drill. Geologist $ 170,000 ‖
No Oil 55% $ -100,000
If the report not Fav, do not drill.
Expected net profit $180,000.
Don’t Drill $0
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1. Expected value with sample Don’t Drill $ -10,000
information (EVWSI) = $ 370,000
180,000 + 10,000 =190,000
Oil 80% $ 490,000

Drill ‖ $ 370,000
Fav 50%
2. Expected value with original
information (EVWOI)
No Oil 20% $ -110,000
170,000
$ 180,000 Don’t Drill $ -10,000
- $ 10,000
3. Expected value of sample Hire Geologist
‖
Not Fav 50%
information (EVSI)) Oil 10% $ 490,000
190,000 - 170,000 = 20,000 ‖ - $ 50,000
Drill

$ 180,000 No Oil 90% $ -110,000

$ 500,000
$ 170,000 Oil 45%
Since the cost of the hiring
Geologist ($10,000) bellow EVSI, Don’t Hire Drill
‖
Geologist $ 170,000
Olico should hire the Geologist No Oil 55% $ -100,000
to get additional information
about the land.
Don’t Drill $0
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 1. Expected value with perfect
$ 500,000
Drill information (EVWPI) = 225,000
ER = 0.45*(500,000) + 0.55*(0)
= $225,000.
2. Expected value of perfect
Oil 45% information (EVPI) =
Don’t Drill 225,000 – 170,000 = 55,000
$0

$ 225,000
Thus, a perfect (one that was
- $ 100,000 always correct) from geologist
Drill
No Oil 55% report would be worth $55,000.
that is, report (no matter how
good) can be worth more than
Don’t Drill $55,000.
$0

Perfect information → all uncertain events that can affect reward still occur with the given probabilities,
but Decision maker finds out event is happening before making the decision.

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Outline

Decision Tree excercise

Review Bayes Rule

Bayes Rule and Decision Tree

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Review on Bayes’ Rule

❑ An important decision often depends on the “state of the world” and its
probability.
❑ The states of the world are collectively exhaustive: S1, S2, . . . , Sn include all
possibilities.
❑ Suppose a decision maker assigns a probability P(Si) to Si.
❑ P(Si) is the prior probability of Si.
States of the world S = {Rumah, Wayang}
P (Rumah) = 0.5 dan P (Wayang)=0.5 → Prior Probabilities.

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Review on Bayes’ Rule (2)

❑ To obtain more information about the state of the world, the decision maker
may observe the outcome of an experiment.
❑ Suppose that for each possible outcome Oj and each possible state of the world
Si, the decision maker knows P(Oj|Si), the likelihood of the outcome Oj given
state of the world Si.
❑ Bayes’ rule combines prior probabilities and likelihoods with the experimental
outcomes to determine a post-experimental probability, or posterior
probability, for each state of the world, P(Si|Oj).
𝑷 𝑶𝒋 ห𝑺𝒊 𝑷 𝑺𝒊
𝑷 𝑺𝒊 ቚ𝑶𝒋 = 𝒌=𝒏
σ𝒌=𝟏 𝑷 𝑶𝒋 ห𝑺𝒌 𝑷 𝑺𝒌

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Review on Bayes’ Rule (3)

❑ In short way. We use bayes if we are given information:

❑ State of the world S = {S1, S2, . . . , Sn }
❑ Prior Probabilities P(Si), for i=1,2, …, n.
❑ Likelihood of Outcome Oj given state of the world Sj, P(Oj|Si).

❑ And we want to know the Posterior Probability P(Si|Oj).

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How to Calculate the Posterior Probability

1. Calculate the joint probability, 𝑃 𝑆𝑖 ∩ 𝑂𝑗 .

𝑃 𝑆𝑖 ∩ 𝑂𝑗 = 𝑃 𝑂𝑗 ห𝑆𝑖 ∙ 𝑃 𝑆𝑖

2. Calculate the Marginal probability, 𝑃 𝑂𝑗 .

𝑃 𝑂𝑗 = σ𝑘=𝑛
𝑘=1 𝑃 𝑂𝑗 ห𝑆𝑘 ∙ 𝑃 𝑆𝑘

3. Calculate the Posterior Probability P(Si|Oj)

𝑃 𝑂𝑗 ห𝑆𝑖 𝑃 𝑆𝑖 → The joint probability, 𝑃 𝑆𝑖 ∩ 𝑂𝑗

𝑃 𝑆𝑖 ቚ𝑂𝑗 =
σ𝑘=𝑛
𝑘=1 𝑃 𝑂𝑗 ห𝑆𝑘 𝑃 𝑆𝑘 → the Marginal probability, 𝑃 𝑂𝑗 .
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Example on Bayes’ Rule

❑ Suppose that 1% of all children have tuberculosis (TB).

❑ When a child who has TB is given the Mantoux test, a positive test result occurs
95% of the time. When a child who does not have TB is given the Mantoux test, a
positive test result occurs 1% of the time.
❑ Given that a child is tested and a positive test result occurs, what is the
probability that the child has TB?
❑ State of the world → S {TB, NTB)
❑ Prior Probabilities → P(TB) = 0.01, then P(NTB)= 0.99.
❑ Experiment (Mantoux Test). Outcome of the test → O {P, N}
Likelihood of the test → 𝑃 𝑃ȁ𝑇𝐵 = 0.95, 𝑃 𝑃ȁ𝑁𝑇𝐵 = 0.01.
Questions: 𝑃 𝑇𝐵ȁ𝑃
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Example on Bayes’ Rule (2)
P(TB) = 0.01 P(NTB)= 0.99. 𝑃 𝑂𝑗 ห𝑆𝑖 𝑃 𝑆𝑖
𝑃 𝑃ȁ𝑇𝐵 = 0.95 𝑃 𝑃ȁ𝑁𝑇𝐵 = 0.01. 𝑃 𝑆𝑖 ቚ𝑂𝑗 =
σ𝑘=𝑛
𝑘=1 𝑃 𝑂𝑗 ห𝑆𝑘 𝑃 𝑆𝑘

Questions: 𝑃 𝑇𝐵ȁ𝑃 ? 𝑃 𝑃ȁ𝑇𝐵 𝑃 𝑇𝐵

𝑃 𝑇𝐵ȁ𝑃 =
𝑃 𝑃ȁ𝑇𝐵 𝑃 𝑇𝐵 + 𝑃 𝑃ȁ𝑁𝑇𝐵 𝑃 𝑁𝑇𝐵

0.95 ∙ 0.01
𝑃 𝑇𝐵ȁ𝑃 =
0.95 ∙ 0.01 + 0.01 ∙ 0.99

𝑃 𝑇𝐵ȁ𝑃 = 0.4897

Other posterior probabilities? Probability the child have tuberculosis, given

the test result positive is 48.97%.
P NTBȁP , P TBȁN , P NTBȁN
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Prior Probabilities → P(TB) = 0.01, P(NTB)= 0.99. 1. Calculate the joint probability,

Likelihood of the test → 𝑃 𝑃ȁ𝑇𝐵 = 0.95 → 𝑃 𝑁ȁ𝑇𝐵 = 0.05

𝑷 𝑺𝒊 ∩ 𝑶𝒋 .
𝑃 𝑃ȁ𝑁𝑇𝐵 = 0.01 → 𝑃 𝑁ȁ𝑁𝑇𝐵 = 0.99 𝑃 𝑆𝑖 ∩ 𝑂𝑗 = 𝑃 𝑂𝑗 ห𝑆𝑖 ∙ 𝑃 𝑆𝑖

Questions: Posterior Probabilities, 𝑃 𝑆𝑖 ቚ𝑂𝑗 ?

𝑂𝑗 𝑆𝑖 𝑃 𝑆𝑖 𝑃 𝑶𝒋 ห 𝑺𝒊 𝑃 𝑆𝑖 ∩ 𝑂𝑗 2. Calculate the Marginal probability,
𝑷 𝑶𝒋 .
Positive TB 0.01 x 0.95 = 0.0095 𝑃 𝑂𝑗 = σ𝑘=𝑛
𝑘=1 𝑃 𝑂𝑗 ห𝑆𝑘 ∙ 𝑃 𝑆𝑘
(P)
NTB 0.99 0.01 0.0099
0.019 → 𝑃 𝑃 = 0.0194
Negative TB 0.01 0.05 0.0005 Sum of all the marginal
(N) probability is 1.
NTB 0.99 0.99 0.9801
0.9806 → 𝑃 𝑁 = 0.9806

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3. Calculate the Posterior Probability, P(Si|Oj)

𝑷 𝑶𝒋 ห𝑺𝒊 𝑷 𝑺𝒊 → The joint probability, 𝑃 𝑆𝑖 ∩ 𝑂𝑗

𝑷 𝑺𝒊 ቚ𝑶𝒋 =
σ𝒌=𝒏
𝒌=𝟏 𝑷 𝑶𝒋 ห𝑺𝒌 𝑷 𝑺𝒌 → the Marginal probability, 𝑃 𝑂𝑗 .

𝑂𝑗 𝑆𝑖 𝑃 𝑆𝑖 𝑃 𝑶𝒋 ห 𝑺𝒊 𝑃 𝑆𝑖 ∩ 𝑂𝑗 𝑃 𝑆𝑖 ቚ𝑂𝑗

Positive TB 0.01 0.95 0.0095 0.4897 𝑃 𝑇𝐵 ȁ𝑃 𝑷 𝑻𝑩ȁ𝑷 = 0.0095 : 0.019 = 0.4897

(P)
NTB 0.99 0.01 0.0099 0.5103 𝑃 𝑁𝑇𝐵 ȁ𝑃 𝑷 𝑵𝑻𝑩ȁ𝑷 = 0.0099 : 0.019 = 0.5103

0.019 1
Negative TB 0.01 0.05 0.0005 0.0005 𝑃 𝑇𝐵 ȁ𝑁
(N)
NTB 0.99 0.99 0.9801 0.9995 𝑃 𝑁𝑇𝐵 ȁ𝑁

0.9806 1

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Outline

Decision Tree excercise

Review Bayes Rule

Bayes Rule and Decision Tree

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Bayes Rule and Decision Tree

Many other decision tree problems share several common features, such as:
❑ There are several states of the world. Different states of the world result in
different payoffs to the decision maker.
❑ The estimates of the probabilities of each state of the world.
P(Si) →prior probabilities.
❑ The additional information that gives the decision maker more foreknowledge
about the state of the world.
❑ The decision maker receives information by observing the outcomes of an
experiment. Let S1, S2, . . . , Sn denote the possible states of the world, and let O1,
O2, . . . , Om be the possible outcomes of the experiment.

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Bayes Rule and Decision Tree (2)

❑ Given knowledge of the outcome of the experiment, these probabilities give

new values for the probability of each state of the world. The probabilities
P(Si|Oj) → posterior probabilities.

Colaco Example:
The prior probabilities are P(NS)=0.55 and P(NF)=0.45.
The experiment → the test-marketing procedure, with two possible outcomes (LF and LS).
The posterior probabilities were given to be P(NS|LS)=0.85, P(NS|LF)=0.10, P(NF|LS)=0.15,
P(NF|LF)=0.90

❑ The posterior probabilities just listed were used to define the event forks in the
decision tree that followed the action Test market.
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❑ Colaco’s Decision Tree

𝑃 𝑁𝑆ȁ𝐿𝑆

𝑃 𝐿𝑆

𝑃 𝑁𝐹ȁ𝐿𝑆

𝑃 𝐿𝐹

𝑃 𝑁𝑆ȁ𝐿𝐹

𝑃 𝑁𝐹ȁ𝐿𝐹

𝑃 𝑁𝑆

𝑃 𝑁𝐹
𝑃𝑟𝑖𝑜𝑟 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑃𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
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Bayes Rule and Decision Tree (3)

❑ In many situations, however, we may be given the prior probabilities p(si) for
each state of the world, and instead of being given the posterior probabilities
p(si|oj), we might be given the likelihoods P(Oj|Si).
❑ For each state of the world, the likelihoods give the probability of observing
each experimental outcome.

Colaco example:
The prior probabilities are P(NS)=0.55 and P(NF)=0.45.
The likelihood were given to be:
51 4 9 36
P(LS|NS)= , P(LF|NS)= , P(LS|NF)= , P(LF|NF)=
55 55 45 45
To complete the decision tree, we need to calculate the posterior probabilities.
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 The prior probabilities are P(NS)=0.55 and P(NF)=0.45. 1. Calculate the joint probability,
The likelihood: 𝑷 𝑺𝒊 ∩ 𝑶𝒋 .
51 4 9 36
P(LS|NS)= , P(LF|NS)= , P(LS|NF)= , P(LF|NF)= 𝑷 𝑺𝒊 ∩ 𝑶𝒋 = 𝑷 𝑶𝒋 ห𝑺𝒊 ∙ 𝑷 𝑺𝒊
55 55 45 45

Questions: Posterior Probabilities, 𝑃 𝑆𝑖 ቚ𝑂𝑗 ?

𝑂𝑗 𝑆𝑖 𝑃 𝑆𝑖 𝑃 𝑶𝒋 ห 𝑺𝒊 𝑃 𝑆𝑖 ∩ 𝑂𝑗 2. Calculate the Marginal probability,
𝑷 𝑶𝒋 .
Local NS 0.55 x 51/55 = 0.51
𝑷 𝑶𝒋 = σ𝒌=𝒏
𝒌=𝟏 𝑷 𝑶𝒋 ห𝑺𝒌 ∙ 𝑷 𝑺𝒌
Success
(LS)
NF 0.45 9/45 0.09
0.6 → 𝑃 𝐿𝑆 = 0.6
Local NS 0.55 4/55 0.04 Sum of all the marginal
Failure probability is 1.
(LF)
NF 0.45 36/45 0.36
0.4 → 𝑃 𝐿𝐹 = 0.4

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3. Calculate the Posterior Probability, P(Si|Oj)

𝑷 𝑶𝒋 ห𝑺𝒊 𝑷 𝑺𝒊 → The joint probability, 𝑃 𝑆𝑖 ∩ 𝑂𝑗

𝑷 𝑺𝒊 ቚ𝑶𝒋 =
σ𝒌=𝒏
𝒌=𝟏 𝑷 𝑶𝒋 ห𝑺𝒌 𝑷 𝑺𝒌 → the Marginal probability, 𝑃 𝑂𝑗 .

𝑂𝑗 𝑆𝑖 𝑃 𝑆𝑖 𝑃 𝑶𝒋 ห 𝑺𝒊 𝑃 𝑆𝑖 ∩ 𝑂𝑗 𝑃 𝑆𝑖 ቚ𝑂𝑗

Local NS 0.55 51/55 0.51 0.85 𝑃 𝑁𝑆ȁ𝐿𝑆 𝑃 𝑁𝑆ȁ𝐿𝑆 = 0.51 : 0.6 = 0.85
Success
(LS)
NF 0.45 9/45 0.09 0.15 𝑃 𝑁𝐹 ȁ𝐿𝑆 𝑃 𝑁𝐹 ȁ𝐿𝑆 = 0.09 : 0.6 = 0.15

0.6 1
Local NS 0.55 4/55 0.04 0.1 𝑃 𝑁𝑆ȁ𝐿𝐹 𝑃 𝑁𝑆ȁ𝐿𝐹 = 0.04 : 0.4 = 0.1
Failure
(LF)
NF 0.45 36/45 0.36 0.9 𝑃 𝑁𝐹 ȁ𝐿𝐹 𝑃 𝑁𝐹 ȁ𝐿𝐹 = 0.36 : 0.4 = 0.9
0.4 1

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Terima Kasih
Yani Herawati
Program Studi Teknik Industri
UNPAR
yani.herawati@unpar.ac.id