cost of choices Decision tree analysis uses EMV to help you make choices There's another way to do EMV--you can do it visually using something called a decision tree. This decision tree shows the hidden costs of whether or not you buy a heavier tent. The tent is more expensive--it costs $350, while the lighter tent costs $130. But the heavier tent has better protection against the wind, so if there are high winds, your equipment isn't damaged. Is it worth spending $350 on a heavier tent, rather than $130 on the lighter one? Yes Buy heavier tent? No The national weather service says there's a 35% chance of high winds, which means there's a 65% chance of low winds. -$350 If you buy a heavy tent, then it protects your equipment better, but it'll cost more. You figure that if there are high winds, you'll lose $953 worth of equipment with a light tent, but only $48 worth if you have a heavy one. If there are low winds, then you'll only lose $15 worth with a light tent and $10 worth with a heavy tent. 35% High Winds -$48 EMV = 35% x -$48 -$16.80 65% Low Winds -$10 These costs are lower because the heavy tent gives you more protection against the wind EMV = 65% x -$10 -$6.50 -$130 35% High Winds -$953 Each of the four branches of this decision tree wha has its own EMV. This branch shows you tent t and t buy the heavier happens when you don' the high winds occur. The tent costs $130. Add $953 = the EMV for high winds, which is 35% x ch is $130 cost for this bran $333.55. So the total + $333.55 = $463.55 EMV = 35% x -$953 -$333.55 65% Low Winds -$15 EMV = 65% x -$15 -$9.75 This is just the EMV of the low winds if you buy the heavier tent. The probability of low winds is 65%, and the Compare that with the EMV of choosing the lighter tent. Which decision makes sense? cost is $10. So it's just like We can do the same thing for the bottom two branches of the tree. The the other EMV calculations: "cheaper" tent costs -$130 + -$333.55 + -$9.75 = $473.30. So it's 65% x -$10 = -$6.50. What's the EMV ­ or how much it's likely to cost you ­ of choosing the heavier tent? If we add the EMV for high winds plus the EMV for low winds to the cost of the tent, we'll figure out the "real" cost of choosing the heavier tent. So that's -$16.80 + -$6.50 + -$350 = -$373.30. actually more expensive! Chapter 11 534