This worksheet provides information for a company to decide whether to invest in new stores, old stores, or do nothing. It lists the costs, probabilities of a strong or weak economy, and expected returns for each option. Students are asked to design a decision tree and assess which option is most convenient based on the information given.
IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007
NCV 2 Entrepreneurship Hands-On Support Slide Show - Module 3Future Managers
This slide show complements our learner guide NCV 2 Entrepreneurship Hands-On Training by Pieter Bruwer & Nickey Cilliers, published by Future Managers Pty Ltd. For more information visit our website www.futuremanagers.net
IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007
NCV 2 Entrepreneurship Hands-On Support Slide Show - Module 3Future Managers
This slide show complements our learner guide NCV 2 Entrepreneurship Hands-On Training by Pieter Bruwer & Nickey Cilliers, published by Future Managers Pty Ltd. For more information visit our website www.futuremanagers.net
Startupfest 2013 - Build 2B bought! - Randy SmerikStartupfest
You never want to have to sell your company … but you always want to be bought! Always remember that you have two products: what you design, build, and sell -- and the company itself. In this workshop, we'll look at how an “exit strategy” is an essential part of any solid business plan. Bottom line: you want to create a company that is an irresistible target for buyers – yes, you do!
To build entrepreneurs for self-employment for the Youth and Individuals of the Community and other First Nations. And after establishing its base in the Community, will do the same function throughout the Aboriginal World and Mainstream world.
Page 1 of 11 Chapter 3 Fundamentals of Decision Making.docxgerardkortney
Page 1 of 11
Chapter 3
Fundamentals of Decision Making
Using EMVs, EOLs, and EVPIs to Make Choices in Business
I. Decision theory – An analytic and systematic approach to solving problems. Just like
quantitative analysis, decision theory has its own set of steps:
A. Define the problem.
B. List the possible alternatives.
C. Identify the possible outcomes.
D. List the payoff of each combination of alternatives and outcomes.
E. Select one of the mathematical decision theory models.
F. Apply the model and make a decision.
Page 2 of 11
II. Let’s look at one of these decisions in action: THIS IS NOT HOMEWORK: It is only an example.
A. Define the problem. Maria wants to set up a dress shop in a vacant space at the local mall.
B. List the possible alternatives. She can set up a small shop, a medium shop, or no shop.
C. Identify the possible outcomes. Maria believes that there are three possible outcomes: a
good economy, a fair economy, and a poor economy.
1. Remember: It is important to consider all possible outcomes. Ignoring outcomes—bad
or good—can do considerable damage to the decision making process.
D. List the payoff of each combination of alternatives and outcomes. Maria maps out all
outcomes in terms of profits, but other outcomes can be used. This is what she finds:
Good Market Fair Market Poor Market
Small Shop $75,000 $25,000 -$40,000
Medium Shop $100,000 $35,000 -$60,000
No Shop $0 $0 $0
If Maria chooses to build a small shop and the market is good, she makes $75,000.
If Maria chooses to build a medium shop and the market is poor, she loses $60,000.
If Maria chooses to do nothing, she neither gains nor loses money.
Etc.
E. Select one of the mathematical decision theory models, and make a decision. This is where
Maria has choices to make, some of which are dependent upon what she wants and what she
knows.
Page 3 of 11
Decision-Making Tool 1: The Expected Monetary Value (EMV)
One tool that Maria can use to help her make a decision is the Expected Monetary Value, or EMV.
Simply put, the EMV helps weigh the risks and rewards of each choice to make the best
possible decision.
To do this, the EMV weighs the possible benefits of each decision with the chance of each
event happening.
Let me show you how the EMV works with Maria’s situation.
A. In order to do an EMV, Maria needs two things:
1. The grid we built on page 2, and
2. The odds of how good the economy is going to be over the next year.
B. Let’s suppose Maria knows the odds of the economy going different directions over the next
year (for information on how decision-makers get this information, ask your instructor):
a. First, the chance of a good economy is 20%.
b. Second, the chance of a fair economy is 50%.
c. Third, the chance of a poor economy is 30%.
C. She can use this knowledge to make a decision about what kind o.
Startupfest 2013 - Build 2B bought! - Randy SmerikStartupfest
You never want to have to sell your company … but you always want to be bought! Always remember that you have two products: what you design, build, and sell -- and the company itself. In this workshop, we'll look at how an “exit strategy” is an essential part of any solid business plan. Bottom line: you want to create a company that is an irresistible target for buyers – yes, you do!
To build entrepreneurs for self-employment for the Youth and Individuals of the Community and other First Nations. And after establishing its base in the Community, will do the same function throughout the Aboriginal World and Mainstream world.
Page 1 of 11 Chapter 3 Fundamentals of Decision Making.docxgerardkortney
Page 1 of 11
Chapter 3
Fundamentals of Decision Making
Using EMVs, EOLs, and EVPIs to Make Choices in Business
I. Decision theory – An analytic and systematic approach to solving problems. Just like
quantitative analysis, decision theory has its own set of steps:
A. Define the problem.
B. List the possible alternatives.
C. Identify the possible outcomes.
D. List the payoff of each combination of alternatives and outcomes.
E. Select one of the mathematical decision theory models.
F. Apply the model and make a decision.
Page 2 of 11
II. Let’s look at one of these decisions in action: THIS IS NOT HOMEWORK: It is only an example.
A. Define the problem. Maria wants to set up a dress shop in a vacant space at the local mall.
B. List the possible alternatives. She can set up a small shop, a medium shop, or no shop.
C. Identify the possible outcomes. Maria believes that there are three possible outcomes: a
good economy, a fair economy, and a poor economy.
1. Remember: It is important to consider all possible outcomes. Ignoring outcomes—bad
or good—can do considerable damage to the decision making process.
D. List the payoff of each combination of alternatives and outcomes. Maria maps out all
outcomes in terms of profits, but other outcomes can be used. This is what she finds:
Good Market Fair Market Poor Market
Small Shop $75,000 $25,000 -$40,000
Medium Shop $100,000 $35,000 -$60,000
No Shop $0 $0 $0
If Maria chooses to build a small shop and the market is good, she makes $75,000.
If Maria chooses to build a medium shop and the market is poor, she loses $60,000.
If Maria chooses to do nothing, she neither gains nor loses money.
Etc.
E. Select one of the mathematical decision theory models, and make a decision. This is where
Maria has choices to make, some of which are dependent upon what she wants and what she
knows.
Page 3 of 11
Decision-Making Tool 1: The Expected Monetary Value (EMV)
One tool that Maria can use to help her make a decision is the Expected Monetary Value, or EMV.
Simply put, the EMV helps weigh the risks and rewards of each choice to make the best
possible decision.
To do this, the EMV weighs the possible benefits of each decision with the chance of each
event happening.
Let me show you how the EMV works with Maria’s situation.
A. In order to do an EMV, Maria needs two things:
1. The grid we built on page 2, and
2. The odds of how good the economy is going to be over the next year.
B. Let’s suppose Maria knows the odds of the economy going different directions over the next
year (for information on how decision-makers get this information, ask your instructor):
a. First, the chance of a good economy is 20%.
b. Second, the chance of a fair economy is 50%.
c. Third, the chance of a poor economy is 30%.
C. She can use this knowledge to make a decision about what kind o.
1. UNIDAD EDUCATIVA BILINGUE NUEVO MUNDO
WORKSHEET
FOR ING 01 VER 15 04 11
Teacher: Alex Arancibia/Verónica Icaza Name: ……………………………
Course: 2nd Bach Section:…………………………
Subject: Business & Management Date: __ July, 2012
Activity: Decision trees
A company wants to know which of the following three decisions it should make. Based on the
information provided, design a decision tree and assess which is the most convenient decision.
Decision Probability of a strong economy Probability of a strong economy
Cost Euros
Points (80% chance) and the expected value (20% chance) and the expected value
Invest in New If the economy is strong 3 Million return If the economy is weak 1 million return
2 Million
stores (probability of a strong economy is 80%) (probability of a weak economy is 20%)
Invest in Old If the economy is strong 1Million return If the economy is weak 200,000 return
150,000
stores (probability of a strong economy is 80%) (probability of a weak economy is 20%)
If the economy is strong 200,000 return If the economy is weak 75,000 return
Do nothing None
(probability of a strong economy is 80%) (probability of a weak economy is 20%)
Approved by: ________________________ Date: 14jul2012 # of copies: ____ Pages: 1/__