| Applying science to business management |
   
Risk Profile
A decision tree conveys a great deal of information about your
decision. It presents all of your options, the potential
consequences of each option, contingent actions, and outcome
values. However, if your tree is large, it is often difficult to
appreciate the level of risk you are assuming by choosing a
particular option. Keep in mind that the decision trees
illustrated so far assume you are completely indifferent to risk.
Generating a risk profile graph helps you to understand and
communicate the risks involved.
In the real estate example, you know that going ahead with the
project has an expected value of $14,200 vs. $0 if you do
nothing. However, going ahead also means that you could lose as
much as $40,000 if things don't go well. A risk profile graph
shows all of the possible outcomes and their probabilities so
that these factors are understood.
To construct a risk profile graph, point to Decision Tree
in the Tools menu and click Risk Profile Graph. All
you need to do is enter the name of the root node in your tree
and tell DecisionPro which nodes are terminal and DecisionPro
automatically creates the appropriate graph.
You get the following graph for the real estate example:
You can also create a table of outcome values by choosing the Risk
Profile Table tool and following the same procedure.
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