Decision Making Analysis About Penzoil
Making Choices
동국대학교 산업시스템공학과 의사결정연구실
Case: Texaco vs. Penzoil
Hue Liedtke’s decision tree
Accept $2 Billion Texaco Accepts $5 Billion (0.17)
(0.2) Settlement Amount ($ Billion) 2 5 10.3 5 0 10.3 5 0 3
Counteroffer $5 Billion
Texaco Refuses Counteroffer (0.50)
Final Court Decision
(0.5) (0.3)
Texaco Counteroffers $3 Billion (0.33)
(0.2) Refuse Final Court Decision (0.5) (0.3) Accept $3 Billion
Decision Tree and EMV
Expected Value (EV) Expected Monetary Value (EMV) Folding back the tree (Averaging-out and folding-back process)
Start at the end-points of the branches on the far right-hand side and move to the left Calculate expected value when you encounter a chance node Choose the branch with the highest value or expected value when you encounter a decision node
Case: Texaco vs. Penzoil
Hue Liedtke’s solved decision tree
Accept $2 Billion
Settlement Amount ($ Billion) 2
4.63
Texaco Accepts $5 Billion (0.17)
(0.2)
5 10.3 5 0 10.3 5 0 3
Counteroffer $5 Billion
4.63
Texaco Refuses Counteroffer (0.50)
4.56
Final Court Decision (0.5) (0.3) (0.2)
Texaco Counteroffers $3 Billion (0.33)
4.56
Refuse Final Court Decision (0.5) (0.3) Accept $3 Billion
4.56
Case: Texaco vs. Penzoil
Influence diagram for Liedtke’s decision
Accept $2 Billion?
Alternatives Accept 2 Counter 5
Texaco Reaction
Outcomes (Prob) Accept 5 (0.17) Refuse (0.50) Counter 3 (0.33)
Penzoil Reaction
Alternatives Accept 3 Refuse
Settlement Amount
Amounts: …
Final Court Decision
Outcomes (Prob) $10.3 Billion (0.2) $5.0 Billion (0.5) $0 (0.3)
Risk Profiles
A Risk profile: “a graph that shows the chances associated with possible consequences”
Each risk profile is associated with a strategy. In constructing a risk profile, we collapse a decision tree by multiplying out the probabilities on sequential chance branches. At a decision node, only one branch is taken.
동국대학교 산업시스템공학과 의사결정연구실
Case: Texaco vs. Penzoil
Hue Liedtke’s decision tree
Accept $2 Billion Texaco Accepts $5 Billion (0.17)
(0.2) Settlement Amount ($ Billion) 2 5 10.3 5 0 10.3 5 0 3
Counteroffer $5 Billion
Texaco Refuses Counteroffer (0.50)
Final Court Decision
(0.5) (0.3)
Texaco Counteroffers $3 Billion (0.33)
(0.2) Refuse Final Court Decision (0.5) (0.3) Accept $3 Billion
Decision Tree and EMV
Expected Value (EV) Expected Monetary Value (EMV) Folding back the tree (Averaging-out and folding-back process)
Start at the end-points of the branches on the far right-hand side and move to the left Calculate expected value when you encounter a chance node Choose the branch with the highest value or expected value when you encounter a decision node
Case: Texaco vs. Penzoil
Hue Liedtke’s solved decision tree
Accept $2 Billion
Settlement Amount ($ Billion) 2
4.63
Texaco Accepts $5 Billion (0.17)
(0.2)
5 10.3 5 0 10.3 5 0 3
Counteroffer $5 Billion
4.63
Texaco Refuses Counteroffer (0.50)
4.56
Final Court Decision (0.5) (0.3) (0.2)
Texaco Counteroffers $3 Billion (0.33)
4.56
Refuse Final Court Decision (0.5) (0.3) Accept $3 Billion
4.56
Case: Texaco vs. Penzoil
Influence diagram for Liedtke’s decision
Accept $2 Billion?
Alternatives Accept 2 Counter 5
Texaco Reaction
Outcomes (Prob) Accept 5 (0.17) Refuse (0.50) Counter 3 (0.33)
Penzoil Reaction
Alternatives Accept 3 Refuse
Settlement Amount
Amounts: …
Final Court Decision
Outcomes (Prob) $10.3 Billion (0.2) $5.0 Billion (0.5) $0 (0.3)
Risk Profiles
A Risk profile: “a graph that shows the chances associated with possible consequences”
Each risk profile is associated with a strategy. In constructing a risk profile, we collapse a decision tree by multiplying out the probabilities on sequential chance branches. At a decision node, only one branch is taken.