Part 2. MM4XL Tools > 1. Strategic Tools > Decision Tree > 1. An Example as an Appetizer > Technicalities

Decision Tree


As we shall see, we distinguish three investor profiles: risk averse, neutral, and risk taker. VitroLabs board is discussing a challenge the company can basically afford, and they are also taking into account selling the molecule. This lets us speculate that they are at the low end of the risk scale, although they are ready to take some risk. We developed the tree below to identify the most appealing investment for this moderately risk averse company, which is the investment with the largest Expected Monetary Value (EMV).

EMV can be interpreted as a weighted average of the outcomes of an event. For example, the branch Coating paint was assessed as to return with 60% probability Great sales results, estimated at $100 million; Good sales result ($80 million) with 30% probability, or Poor sales ($60 million) in 10% of cases. The sum of probabilities is 1 and the EMV of the branch, $79.0 million, is obtained with the sum of the weighted monetary values times their probability of occurrence minus the initial investment required for the venture

Decision Tree Software for Business and Management Model Making

In other words, EMV is assuming that if we, for instance, pay a ticket of $11 to spin a wheel and in 60% of cases we win $100, and so on according to the values we used before, in the long-run we win $79. DTree applies consistently the concept above and its output result consists of a structured and utilitarian comparison of all available possibilities.

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