Mastering Financial Modelling in Microsoft Excel 3rd edn, 3rd Edition

21

Decision trees

Introduction

Bayes’ theorem

Terminology

Decision tree model

Information example

Summary

INTRODUCTION

Chapter 16 added risk techniques to a project model to examine the possible variance or confidence in the answer. Most business alternatives involve an element of risk or uncertainty and one aspect of modelling is to try to quantify risk so that more reasoned judgements can be made. Similarly, many decisions involve financial alternatives and decision trees attempt to quantify the gain or cost of following different alternatives by applying probability mathematics and presenting the choices in numerical terms. The file for this chapter is MFM3_21_Decisions.

For example, you could be faced with acquiring differently priced ...