Decision Trees Using TreePlan

16

16.1 TREEPLAN OVERVIEW

TreePlan is a decision tree add-in for Microsoft Excel 20032013 (Windows) and Microsoft Excel 2011 (Macintosh). TreePlan helps you build a decision tree diagram in an Excel worksheet using dialog boxes. Decision trees are useful for analyzing sequential decision problems under uncertainty. Your decision tree model may include various controllable alternatives (e.g., whether to introduce a new product, whether to bid on a new project) and uncontrollable uncertainties (e.g., possible demand for a product, whether you're awarded a contract), arranged in chronological order. TreePlan automatically includes formulas for summing cash flows to obtain outcome values and for calculating rollback values for determining the optimal strategy. To use TreePlan, you (1) open a new worksheet, (2) press Ctrl+Shift+T (or Options+Cmd+T) to build a new decision tree diagram, (3) select a node to change the structure of your decision tree, (4) enter branch names, cash flows, and probabilities, and (5) determine the optimal strategy from TreePlan's results. All of TreePlans functionality, including its built-in help, is a part of the TreePlan XLA file. There is no separate setup file or help file. When you use TreePlan on a Windows computer, it does not create any Windows Registry entries (although Excel may use such entries to keep track of its add-ins).

16.2 BUILDING A DECISION TREE IN TREEPLAN

On Windows computers, you can start TreePlan either by choosing Tools | Decision Tree from the menu bar (Excel 2003), by choosing Add-ins | Decision Tree (Excel 2007 & 2010 & 2013), or by pressing Ctrl+Shift+T (hold down the Ctrl and Shift keys and press T). On Mac Excel 2011, you can start TreePlan either by choosing Tools | Decision Tree from the menu bar or by pressing Options+Cmd+T (hold down the Options and Command keys and press T). If the worksheet doesn't have a decision tree, TreePlan prompts you with a dialog box with three options; choose New Tree to begin a new tree. TreePlan draws a default initial decision tree with its upper left corner at the selected cell. For example, the figure below shows the initial tree when cell C3 is selected before creating the new tree. (Note that TreePlan writes over existing values in

18 84

Chapter 16 6 Decision Trees Using TreePlan

th he spreadsheet: begin your tre ee to the right of o the area whe ere your data is s stored, and d do not su ubsequently ad dd or delete row ws or columns in the tree-diag agram area.) Figure 16.1 Tre eePlan Initial Default D Decisio on Tree

b adding or modifying m branc ches or nodes i in the default tr ree. To change e the branch Build up a tree by abels or probab bilities, click on n the cell conta aining the label l or probability y and type the n new label la or r probability. To T modify the structure s of the e tree (e.g., add d or delete bran nches or nodes in the tree), select the node n or the cel ll containing th he node in the t tree to modify, , and press Ctr rl+Shift+T (o or Options+Cm md+T). TreePl lan will then pr resent a dialog g box showing t the available c commands. ove, select the square cell Fo or example, to add an event node n to the top branch of the tree shown abo (c cell G4) next to o the vertical line at the end of o a terminal br ranch and press s Ctrl+Shift+T T (or Options+Cmd+ O +T). TreePlan then t presents th his dialog box. . Figure 16.2 Tre eePlan Termina al Node dialog box

t node to the br ranch, we chan nge the selected d terminal node e to an event n node by To add an event electing Chang ge to event nod de in the dialog g box, selectin ng the number o of branches (he ere two), se an nd pressing OK K. TreePlan the en redraws the tree with a cha ance node in p place of the term minal node.

16.2 2 Building a Deci cision Tree in Tre eePlan

185

Figure 16.3 Init tial Decision Tree T Diagram

he dialog boxe es presented by y TreePlan vary y depending on n what you hav ve selected whe en you Th pr ress Ctrl+Shif ft+T (or Options+Cmd+T). The T dialog box x shown below w is presented w when you pr ress Ctrl+Shif ft+T (or Options+Cmd+T) with w an event n node selected; a similar dialog g box is pr resented when you select a de ecision node. If you want to a add a branch to o the selected n node, ch hoose Add bra anch and press s OK. If you want w to insert a decision or eve ent node befor re the se elected node, choose Insert decision d or Ins sert event and press OK. To get a description of the av vailable commands, click on the Help butto on. Fi igure 16.4 Tree ePlan Event Di ialog Box

Th he Copy subtr ree command is i particularly useful u when bu uilding large tr rees. If two or m more parts of f the tree are si imilar, you can n copy and past te "subtrees" ra ather than build ding up each p part se eparately. To copy a subtree, select the node e at the root of f the subtree an nd choose Copy y subtree. Th his tells TreePlan to copy the e selected node e and everythin ng to the right o of it in the tree. To paste th his subtree, sele ect a terminal node n and choos se Paste subtr ree. TreePlan th hen duplicates the sp pecified subtree e at the selecte ed terminal nod de. Si ince TreePlan decision trees are a built direct tly in Excel, yo ou can use Exc cel's commands s to format yo our tree. For ex xample, you ca an use bold or italic i fonts for branch labels: select the cells you want to o format and ch hange them usi ing Excel's form matting comma ands. To help y you, TreePlan provides a Se elect dialog bo ox that appears when you pres ss Ctrl+Shift+ +T (or Options s+Cmd+T) wi ithout a no ode selected. You Y can also br ring up this dia alog box by pre essing the Sele ect button on th he Node di ialog box. From m here, you can n select all item ms of a particu ular type in the tree. For exam mple, if you ch hoose Probabi ilities and press OK, TreePla an selects all ce ells containing probabilities in n the tree.

18 86

Chapter 16 6 Decision Trees Using TreePlan

You Y can then fo ormat all of the probabilities simultaneously s y using Excel's formatting com mmands. (B Because of limitations in Excel, the Select dialog d box may y not be availab ble when work king with ve ery large trees.)

16.3 ANAT TOMY OF F A TREE EPLAN DE ECISION TREE

An A example of a TreePlan dec cision tree is sh hown below. In n the example, a firm must de ecide (1) whether w to prepa are a proposal for a possible contract c and (2 2) which metho od to use to sat tisfy the co ontract. The tre ee consists of decision d nodes, , event nodes a and terminal no odes connected d by br ranches. Each branch b is surro ounded by cells s containing fo ormulas, cell re eferences, or lab abels pe ertaining to tha at branch. You may edit the la abels, probabil lities, and parti ial cash flows a associated with w each branch h. The partial cash c flows are the amount the e firm "gets pa aid" to go down n that br ranch. For the scenario with terminal t value $30,000, the fi firm pays $50,0 000 if it decide es to pr repare the prop posal, receives $250,000 up front fr if awarded d the contract, spends $50,00 00 to try the el lectronic metho od, and spends $120,000 on the t mechanical l method if the electronic met thod fails. Figure 16.5 Nod des, Labels, Ca ash Flows, and d Probabilities

he trees are "so olved" using fo ormulas embed dded in the spre eadsheet. The t terminal value es sum all Th th he partial cash flows f along the e path leading to that termina al node. The tre ee is then "roll led back" by y computing ex xpected values s at event nodes s and by maxim mizing at decis sion nodes; the e rollback EVs appear next t to each node and a show the expected e value e at that point in n the tree. The numbers in th he decision nod des indicate wh hich alternative e is optimal for r that decision. In the exampl le, the "1" in n the first decis sion node indic cates that it is optimal o to prep are the proposal, and the "2" in the se econd decision node indicates s the firm shou uld try the elect tronic method because that al lternative le eads to a higher r expected valu ue, $90,000, th han the mechan nical method, $ $80,000.

16.3 Anatomy of a Tr reePlan Decision n Tree

187

Figure 16.6 Ter rminal Values, Rollback EVs s, and Choice In ndicators

reePlan has a few f options tha at control the way w calculation ns are done in t the tree. To sel lect these Tr op ptions, press th he Options but tton in any of TreePlan's T dialo og boxes. The first choice is whether to ng certain equi Use U Expected Values V or Use Exponential E Utility U Functio on for computin ivalents. Th he default is to o rollback the tr ree using expected values. If f you choose to o use exponenti ial utilities, Tr reePlan will co ompute utilities s of endpoint cash c flows at th he terminal nod des and compu ute expected ut tilities instead of expected va alues at event nodes. n Expected d utilities are c calculated in th he cell be elow the certain equivalents. You may also choose to Max ximize (profit ts) or Minimiz ze (costs) at de ecision nodes; the default is to t maximize pr rofits. If you ch hoose to minim mize costs inste ead, the ca ash flows are in nterpreted as costs, and decis sions are made by choosing th he minimum ex xpected va alue or certain equivalent rath her than the ma aximum. See th he Help file fo or details on the ese options.

188

Chapter 16 Decision Trees Using TreePlan

16.4 TREEPLAN INPUTS AND FORMULAS

Figure 16.7 Influence Chart of TreePlan Inputs and Formulas
Branch Inputs Cell Formulas Defined Name

Cash Flow

Optional

Terminal Node Endpoint Value

Probability

Event Node Rollback Value

Optional

RT (Risk Tolerance)

Decision Node Rollback Value

Decision Node Choice Indicator

Figure 16.8 Explanation of Formulas

Location Endpoint Value at Terminal Node Rollback Value at Event Node Formula SUM of branch cash flows

IF probabilities SUM to approximately one, then SUM the products of probabilities times subsequent rollback values MAX or MIN of subsequent rollback values Nested IF functions

Rollback Value at Decision Node Choice Indicator at Decision Node

16.5 STEP-BY-STEP TREEPLAN TUTORIAL

A decision tree can be used as a model for a sequential decision problems under uncertainty. A decision tree describes graphically the decisions to be made, the events that may occur, and the outcomes associated with combinations of decisions and events. Probabilities are assigned to the events, and values are determined for each outcome. A major goal of the analysis is to determine the best decisions. Decision tree models include such concepts as nodes, branches, terminal values, strategy, payoff distribution, certain equivalent, and the rollback method. The following problem illustrates the basic concepts.

16.5 Step-by-Step TreePlan Tutorial

189

DriveTek Problem
DriveTek Research Institute discovers that a computer company wants a new storage device for a proposed new computer system. Since the computer company does not have research people available to develop the new storage device, it will subcontract the development to an independent research firm. The computer company has offered a fee of $250,000 for the best proposal for developing the new storage device. The contract will go to the firm with the best technical plan and the highest reputation for technical competence. DriveTek Research Institute wants to enter the competition. Management estimates a cost of $50,000 to prepare a proposal with a fifty-fifty chance of winning the contract. However, DriveTek's engineers are not sure about how they will develop the storage device if they are awarded the contract. Three alternative approaches can be tried. The first approach is a mechanical method with a cost of $120,000, and the engineers are certain they can develop a successful model with this approach. A second approach involves electronic components. The engineers estimate that the electronic approach will cost only $50,000 to develop a model of the storage device, but with only a 50 percent chance of satisfactory results. A third approach uses magnetic components; this costs $80,000, with a 70 percent chance of success. DriveTek Research can work on only one approach at a time and has time to try only two approaches. If it tries either the magnetic or electronic method and the attempt fails, the second choice must be the mechanical method to guarantee a successful model. The management of DriveTek Research needs help in incorporating this information into a decision to proceed or not. [Source: The storage device example is adapted from Spurr and Bonini, Statistical Analysis for Business Decisions, Irwin.]

Nodes and Branches

Decision trees have three kinds of nodes and two kinds of branches. A decision node is a point where a choice must be made; it is shown as a square. The branches extending from a decision node are decision branches, each branch representing one of the possible alternatives or courses of action available at that point. The set of alternatives must be mutually exclusive (if one is chosen, the others cannot be chosen) and collectively exhaustive (all possible alternatives must be included in the set). There are two major decisions in the DriveTek problem. First, the company must decide whether or not to prepare a proposal. Second, if it prepares a proposal and is awarded the contract, it must decide which of the three approaches to try to satisfy the contract. An event node is a point where uncertainty is resolved (a point where the decision maker learns about the occurrence of an event). An event node, sometimes called a "chance node," is shown as a circle. The event set consists of the event branches extending from an event node, each branch representing one of the possible events that may occur at that point. The set of events must be mutually exclusive (if one occurs, the others cannot occur) and collectively exhaustive (all possible events must be included in the set). Each event is assigned a subjective probability; the sum of probabilities for the events in a set must equal one. The three sources of uncertainty in the DriveTek problem are: whether it is awarded the contract or not, whether the electronic approach succeeds or fails, and whether the magnetic approach succeeds or fails.

190

Chapter 16 Decision Trees Using TreePlan

In general, decision nodes and branches represent the controllable factors in a decision problem; event nodes and branches represent uncontrollable factors. Decision nodes and event nodes are arranged in order of subjective chronology. For example, the position of an event node corresponds to the time when the decision maker learns the outcome of the event (not necessarily when the event occurs). The third kind of node is a terminal node, representing the final result of a combination of decisions and events. Terminal nodes are the endpoints of a decision tree, shown as the end of a branch on hand-drawn diagrams and as a triangle on computer-generated diagrams. The following table shows the three kinds of nodes and two kinds of branches used to represent a decision tree. Figure 16.9 Nodes and Symbols Type of Node Written Symbol Decision square Event circle Terminal endpoint

Computer Symbol square circle triangle or bar

Node Successor decision branches event branches terminal value

Terminal Values
Each terminal node has an associated terminal value, sometimes called a payoff value, outcome value, or endpoint value. Each terminal value measures the result of a scenario: the sequence of decisions and events on a unique path leading from the initial decision node to a specific terminal node. To determine the terminal value, one approach assigns a cash flow value to each decision branch and event branch and then sum the cash flow values on the branches leading to a terminal node to determine the terminal value. In the DriveTek problem, there are distinct cash flows associated with many of the decision and event branches. Some problems require a more elaborate value model to determine the terminal values. The following diagram shows the arrangement of branch names, probabilities, and cash flow values on an unsolved tree.

16.5 Step-by-S Step TreePlan Tu Tutorial

191

Figure 16.10 Dr riveTek Decisi ion Tree Diagr ram

Use mechanical method $80,000

5 0.5 Ele ectronic success $150,000 0.5 Awarded contract Try electronic c method 0.5 5 Ele ectronic failure $30,000

0.7 7 Ma agnetic success Prepare propo osal Try magnetic c method 0.3 3 Ma agnetic failure $0 $120,000

0.5 t awarded contract Not -$50,000

Don't prepare proposal $0

To build the dec cision tree, you u use TreePlan s dialog boxes s to develop the structure. Yo ou enter a br ranch name, br ranch cash flow w, and branch probability p (for r an event) in t the cells above e and below th he left side of each e branch. As s you build the e tree diagram, TreePlan ente ers formulas in other cells.

Building B the e Tree Diag gram

1. 2. Start with w a new work ksheet. (If no workbook w is op pen, choose Fil le | New. If a w workbook is open, choose c Insert | Worksheet.) W Select cell c A1. In Exc cel 2007 & 201 10 & 2013, cho oose Add-ins | Decision Tree e; in Excel 2003 & 2011, choose e Tools | Decisi ion Tree. Or, in n any Window ws version, pres ss Ctrl+Sh hift+T. In Mac c Excel 2011, press p Options+ +Cmd+T. Subse equent instruct tions refer only to o the Windows shortcut key. In I the TreePlan n New Tree dia alog box, click k the New Tree bu utton. A decisio on node with tw wo branches ap appears.

Figure 16.11 Tr reePlan New Tree T Dialog Box

19 92

Chapter 16 6 Decision Trees Using TreePlan

Figure 16.12 In nitial Decision Tree T Diagram

A 1 2 3 4 5 6 7 8 9 B C D Alternative 1 0 0 1 0 Alternative 2 0 0 0 0 E F G

3.

Select cell c D2, and en nter Prepare proposal p . Selec ct cell D4, and enter 50000. Select cell D7, and d enter Don't prepare p propo osal.

ranch Names and a Cash Flow Figure 16.13 Br

A 1 2 3 4 5 6 7 8 9 B C D E F G

Prepare propos sal -500 000 -50000 2 0 Don't prepare proposal p 0 0 0 -50000

4.

Select cell c F3. Press Ctrl+Shift+T. C In I the TreePlan n Terminal Node dialog box, select Change e To Event Node, select Two o Branches, and d click OK. Th he tree is redraw wn.

Figure 16.14 Tr reePlan Termin nal Node Dialo og Box

16.5 Step-by-Step TreePlan Tutorial

193

Figure 16.15 Initial Event Branches

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 B C D E F G H 0.5 Outcome 3 0 0.5 Outcome 4 -50000 2 0 Don't prepare proposal 0 0 0 0 -50000 I J K

-50000 Prepare proposal -50000 -50000 -50000

5.

Select cell H2, and enter Awarded contract. Select cell H4, and enter 250000. Select cell H7, and enter Not awarded contract.

Figure 16.16 Event Branches With Names and Cash Flow

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 B C D E F G H I 0.5 Awarded contract 250000 200000 J K

200000 Prepare proposal -50000 75000

0.5 Not awarded contract -50000 0 -50000

1 75000 Don't prepare proposal

0 0 0

6.

Select cell J3. Press Ctrl+Shift+T. In the TreePlan Terminal Node dialog box, select Change To Decision Node, select Three Branches, and click OK. The tree is redrawn.

194

Chapter 16 Decision Trees Using TreePlan

Figure 16.17 Subsequent Decision Branches

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 B C D E F G H I J K L Alternative 5 200000 0 0.5 Awarded contract 1 250000 200000 0 200000 200000 M N O

Alternative 6 200000

Prepare proposal -50000 75000 0.5 Not awarded contract 1 75000 0 -50000

Alternative 7 200000 0 200000

-50000

Don't prepare proposal 0 0 0

7.

Select cell L2, and enter Use mechanical method. Select cell L4, and enter 120000. Select cell L7, and enter Try electronic method. Select cell L9, and enter 50000. Select cell L12, and enter Try magnetic method. Select cell L14, and enter 80000.

Figure 16.18 Subsequent Decision Branches With Names and Cash Flows
A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 B C D E F G H I J K L M N O

Use mechanical method 80000 -120000 0.5 Awarded contract 2 250000 150000 -50000 150000 80000

Try electronic method 150000

Prepare proposal -50000 50000 0.5 Not awarded contract 1 50000 0 -50000

Try magnetic method 120000 -80000 120000

-50000

Don't prepare proposal 0 0 0

8.

Select cell N8. Press Ctrl+Shift+T. In the TreePlan Terminal Node dialog box, select Change To Event Node, select Two Branches, and click OK. The tree is redrawn.

16.5 Step-by-Step TreePlan Tutorial

195

Figure 16.19 Branches for Electronic Method Uncertainty

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 B C D E F G H I J K L M N O P Q R S Use mechanical method 80000 -120000 80000 0.5 Outcome 8 0.5 Awarded contract 2 250000 150000 -50000 150000 0.5 Outcome 9 150000 0 Prepare proposal -50000 50000 Try magnetic method 120000 -80000 0.5 Not awarded contract -50000 0 -50000 120000 150000 150000 Try electronic method 0 150000

1 50000

Don't prepare proposal 0 0 0

9.

Select cell P7, and enter Electronic success. Select cell P12, and enter Electronic failure. Select cell P14, and enter 120000.

Figure 16.20 Branch Names and Cash Flows for Electronic Method Uncertainty
A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 B C D E F G H I J K L M N O P Q R S Use mechanical method 80000 -120000 80000 0.5 Electronic success 0.5 Awarded contract 3 250000 120000 -50000 90000 0.5 Electronic failure 30000 -120000 Prepare proposal -50000 35000 Try magnetic method 120000 -80000 0.5 Not awarded contract -50000 0 -50000 120000 30000 150000 Try electronic method 0 150000

1 35000

Don't prepare proposal 0 0 0

10.

Select cell N18. Press Ctrl+Shift+T. In the TreePlan Terminal Node dialog box, select Change To Event Node, select Two Branches, and click OK. The tree is redrawn.

196

Chapter 16 Decision Trees Using TreePlan

Figure 16.21 Branches for Magnetic Method Uncertainty

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 B C D E F G H I J K L M N O P Q R S Use mechanical method 80000 -120000 80000 0.5 Electronic success 150000 0.5 Awarded contract 3 250000 120000 Try electronic method -50000 90000 0 150000

0.5 Electronic failure 30000 -120000 0.5 Outcome 10 30000

Prepare proposal Try magnetic method -50000 35000 -80000 120000 0.5 Outcome 11 0 120000

120000

120000 0 1 35000 0.5 Not awarded contract -50000 0 -50000 120000

Don't prepare proposal 0 0 0

11.

Select cell P16, and enter .7. Select cell P17, and enter Magnetic success. Select cell P21, and enter .3. Select cell P22, and enter Magnetic failure. Select cell P24, and enter 120000.

16.5 Step-by-Step TreePlan Tutorial

197

Figure 16.22 Complete Diagram Before Formatting

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 B C D E F G H I J K L M N O P Q R S Use mechanical method 80000 -120000 80000 0.5 Electronic success 150000 0.5 Awarded contract 2 250000 90000 Try electronic method -50000 90000 0 150000

0.5 Electronic failure 30000 -120000 30000

0.7 Magnetic success Prepare proposal Try magnetic method -50000 20000 -80000 84000 0.3 Magnetic failure 0 -120000 1 20000 0.5 Not awarded contract -50000 0 -50000 0 0 120000 120000

Don't prepare proposal 0 0 0

12.

Double-click the sheet tab (or right-click the sheet tab and choose Rename from the shortcut menu), and enter Original. Save the workbook.

Interpreting the Results

The $30,000 terminal value on the far right of the diagram in cell S13 is associated with the following scenario: Figure 16.23 Evaluation of a Scenario Branch Type Decision Event Decision Event Branch Name Prepare proposal Awarded contract Try electronic method Electronic failure (Use mechanical method) Terminal value Cash Flow $50,000 $250,000 $50,000 $120,000 $30,000

TreePlan put the formula =SUM(P14,L11,H12,D20) into cell S13 for determining the terminal value. Other formulas, called rollback formulas, are in cells below and to the left of each node. These formulas are used to determine the optimal choice at each decision node. In cell B26, a formula displays 1, indicating that the first branch is the optimal choice. Thus, the initial choice is to prepare the proposal. In cell J11, a formula displays 2, indicating that the

19 98

Chapter 16 6 Decision Trees Using TreePlan

se econd branch (n numbered 1, 2, and 3, from to op to bottom) i is the optimal c choice. If awar rded the co ontract, DriveT Tek should try the electronic method. m A sub bsequent chapte er provides mo ore details ab bout interpretat tion.

Formatting F the Tree Diagram D

Th he following st teps show how w to use TreePlan and Excel f features to form mat the tree dia agram. You may m choose to use u other forma ats for your ow wn tree diagram ms. 13. From th he Edit menu, choose Move or o Copy Sheet (or right-click k the sheet tab a and choose Move Or O Copy from the shortcut menu). m In the low wer left corner r of the Move O Or Copy dialog box, b check the e Create A Cop py box, and clic ck OK. eft-aligned, sel On she eet Original (2), if the probabi ilities are not le lect cell H9. Pr ress Ctrl+Sh hift+T. In the TreePlan T Selec ct dialog box, v verify that the o option button f for Cells with Pr robabilities is selected, s and cl lick OK. With all probability y cells selected, , click the Align Left L button.

14.

Figure 16.24 Tr reePlan Select Dialog Box

15.

Select cell c H12. Press s Ctrl+Shift+T. In the TreePl lan Select dialo og box, verify t that the option button for Cell ls with Partial Cash Flows is selected, and c click OK. With h all partial cash flo ow cells selected, if the cash flows are not l left-aligned, cli ick the Align L Left button. With th hose cells still selected, in Ex xcel 2003 and e earlier, choose Format | Cells s; in Excel 2007 or 2010, choose e Home | Forma at | Format Cel lls. In the Form mat Cells dialog box, click the Num mber tab. In th he Category list t box, choose C Currency; type e 0 (zero) for D Decimal Places; ; select $ in the e Symbol list box; select -$1,2 234 for Negati ive Numbers. C Click OK.

16.5 Step-by-S Step TreePlan Tu Tutorial

199

Figure 16.25 Ex xcel Format Ce ells Dialog Box x

16.

Select cell c I12. Press Ctrl+Shift+T. In the TreePla an Select dialog g box, verify th hat the option button for Cell ls with Rollbac ck EVs/CEs is selected, and c click OK. With h all rollback cells selected d, choose Form mat | Cells. Rep peat the Curren ncy formatting of step 16 above. Select cell c S3. Press Ctrl+Shift+T. C In I the TreePlan n Select dialog g box, verify th hat the option button for Cell ls with Termin nal Values is se elected, and cli ick OK. With a all terminal value cells c selected, choose c Format | Cells. Repeat t the Currency y formatting of step 16 above.

17.

200

Chapter 16 Decision Trees Using TreePlan

Figure 16.26 Complete DriveTek Decision Tree

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 B C D E F G H I J K L M N O P Q R S Use mechanical method $80,000 -$120,000 $80,000 0.5 Electronic success $150,000 0.5 Awarded contract 2 $250,000 $90,000 Try electronic method -$50,000 $90,000 $0 $150,000

0.5 Electronic failure $30,000 -$120,000 $30,000

0.7 Magnetic success Prepare proposal Try magnetic method -$50,000 $20,000 -$80,000 $84,000 0.3 Magnetic failure $0 -$120,000 1 $20,000 0.5 Not awarded contract -$50,000 $0 -$50,000 $0 $0 $120,000 $120,000

Don't prepare proposal $0 $0 $0

18.

Double-click the Original (2) sheet tab (or right-click the sheet tab and choose Rename from the shortcut menu), and enter Formatted. Save the workbook.

Displaying Model Inputs

When you build a decision tree model, you may want to discuss the model and its assumptions with co-workers or a client. For such communication it may be preferable to hide the results of formulas that show rollback values and decision node choices. The following steps show how to display only the model inputs. 19. From the Edit menu, choose Move or Copy Sheet (or right-click the sheet tab and choose Move Or Copy from the shortcut menu). In the lower left corner of the Move Or Copy dialog box, check the Create A Copy box, and click OK. On sheet Formatted (2), select cell B1. Press Ctrl+Shift+T. In the TreePlan Select dialog box, verify that the option button for Columns with Nodes is selected, and click OK. With all node columns selected, choose Format | Cells | Number or Home | Format | Format Cells | Number. In the Category list box, select Custom. Select the entry in the Type edit box, and type ;;; (three semicolons). Click OK.

20.

16.5 Step-by-S Step TreePlan Tu Tutorial

201

Figure 16.27 Ex xcel Format Ce ells Dialog Box x

Explanation: A custom numbe er format has fo our sections of f format codes. The sections a are se eparated by sem micolons, and they t define the e formats for po ositive number rs, negative num mbers, zero va alues, and text, , in that order. When you spe ecify three sem micolons withou ut format codes s, Excel do oes not display y positive numb bers, negative numbers, n zero values, or text t. The formula remains in th he cell, but its result r is not dis splayed. Later, if you want to o display the re esult, you can c change the fo ormat without having h to enter r the formula again. Editing a an existing form mat does not de elete it. All fo ormats are save ed with the wor rkbook unless you explicitly delete a forma at. 21. Select cell c A27. Press s Ctrl+Shift+T. In the TreePl lan Select dialo og box, verify t that the option button for Cell ls with Rollbac ck EVs/CEs is selected, and c click OK. With h all rollback values select ted, choose For rmat | Cells | N Number or Hom me | Format | Format Cells | Numb ber. In the Cate egory list box, select Custom. . Scroll to the b bottom of the T Type list box, an nd select the thr ree-semicolon entry. Click O OK. Double e-click the Form matted (2) shee et tab (or right-click the sheet t tab and choos se Rename from th he shortcut men nu), and enter Model M Inputs . Save the wor rkbook.

22.

Printing P the e Tree Diag gram

23. 24. In the Name N Box list box, select Tre eeDiagram (or select cells A1 1:S34). To prin nt the tree diagr ram from Exce el, with the tree e diagram rang ge selected, in E Excel 2003, choose File | Print Ar rea | Set Print Area; A in Excel 2 2007 & 2010 & 2013, choose e Page Layout t | Print Area | Set S Print Area. . In Excel 2003 3 and earlier, ch hoose File | Pa age Setup; in Exce el 2007 & 2010 0 & 2013, choo ose Office Butt ton or File | Pr rint Preview | P Page Setup. In the Page P Setup dia alog box, click the Page tab; f for Orientation n click the optio on button for Lan ndscape, and fo or Scaling click k the option bu utton for Fit To o 1 Page Wide By 1 Page Tall. Click the Heade er/Footer tab; in n the Header li ist box select N None, and in th he Footer list box x select None (or select other appropriate he eaders and foot ters). Click the e Sheet tab;

202

Chapter 16 Decision Trees Using TreePlan

clear the check box for Gridlines, and clear the check box for Row And Column Headings. Click OK. Choose File | Print and click OK. 25. To print the tree diagram from Word, clear the check boxes for Gridlines and for Row And Column Headings on Excels Page Setup dialog box Sheet tab. Select the tree diagram range. In Excel 2003, hold down the Shift key and from the Edit menu choose Copy Picture. In Excel 2007 & 2010 & 2013, choose Home | Paste | As Picture | Copy as Picture. In the Copy Picture dialog box, click the option button As Shown When Printed, and click OK. In Word select the location where you want to paste the tree diagram and choose Edit | Paste.

Figure 16.28 DriveTek Without Rollback Values

Use mechanical method $80,000 -$120,000 0.5 Electronic success $150,000 0.5 Awarded contract $250,000 Try electronic method -$50,000 $0 0.5 Electronic failure $30,000 -$120,000 0.7 Magnetic success Prepare proposal Try magnetic method -$50,000 -$80,000 0.3 Magnetic failure $0 -$120,000 0.5 Not awarded contract -$50,000 $0 $0 $120,000

Don't prepare proposal $0 $0

Alternative Model
If you want to emphasize that the time constraint forces DriveTek to use the mechanical approach if they try either of the uncertain approaches and experience a failure, you can change the terminal nodes in cells R13 and R23 to decision nodes, each with a single branch.

16.6 Exponentiial Utility and Tre eePlan

203

Figure 16.29 Al lternative Driv veTek Decision n Tree

Use mechanical method $80,000 -$120,000 0.5 Electronic success $150,000 0.5 Awa arded contract $250 0,000 Try electronic method -$50,000 $0 0.5 Electronic failure 1 $0 0.7 Magnetic success Prepare proposal Try magnetic method 0 -$50,000 -$80,000 0.3 Magnetic failure 1 $0 0.5 Not awarded contract -$50,000 $0 -$120,000 Use mechanical method $0 $0 $120,000 -$120,000

Use mechanical method $30,000

Don't pre epare proposal $0 $0

16.6 EXPO ONENTIA AL UTILITY Y AND TR REEPLAN N

Tr reePlan's defau ult is to rollbac ck the tree using expected val lue (probability y-weighted ave erage) at an ev vent node and maximum m of successor value es at a decision n node. If you c choose to use e exponential ut tilities in TreeP Plan's Options dialog box, Tr reePlan will red draw the decisi ion tree diagram m with fo ormulas for com mputing the uti ility and certain n equivalent at t each node. Figure 16.30 Tr reePlan Option ns Dialog Box

or the Maximiz ze option with exponential ut tility, the rollba ack formulas a are U = AB*E EXP(X/RT) Fo an nd CE = -LN((A-EU)/B)*RT T, where X and EU are cell re eferences. For t the Minimize o option with ex xponential utili ity, the formula as are U = A-B B*EXP(X/RT) and CE = LN( ((A-EU)/B)*RT T. Tr reePlan uses th he name RT to represent the risk r tolerance p parameter of th he exponential utility fu unction. The na ames A and B determine d scaling. If the nam mes A, B, and R RT don't exist o on the worksheet w when n you choose to o use exponent tial utility, they y are initially d defined as A=1, B=1, and RT=999999999 R 999. You can change c the valu ues of the nam mes using the In nsert | Name | D Define co ommand.

204

Chapter 16 Decision Trees Using TreePlan

16.7 ACKNOWLEDGEMENT
TreePlan was developed by Professor Michael R. Middleton at the University of San Francisco (using the Excel 4 XLM macro programming language) and modified for use at Fuqua (Duke University) by Professor James E. Smith. Mike Middleton rewrote portions using VBA during 2008-2013.