Decision Tree | Solved Problem | Bank: Loan vs Bonds

Описание: This video shows how to solve the given problem using decision tree via silverdecisions.pl
00:00 – Question to Solve
00:38 – Constructing initial tree
02:27 – Additional Information
02:58 – Calculating Posterior Probabilities
04:31 – Multistage decision tree
05:56 – EV with SI
06:08 – Interpreting the decision
06:31 – EVSI


Solved Problem:
A customer approached a bank for a $200,000 one-year loan at 8% annual rate of. If the bank does not approve the loan, the $200,000 will be invested in bonds that earn a 6% annual return. If the loan is approved, the bank believes that there is a 4% chance that the customer will default on the loan. If the customer defaults on the loan, the bank will lose the entire $200,000.
For a $500 consultation fee, the bank can conduct research on the customer’s credit record and obtain a favourable or unfavourable recommendation. In the past, the probability of a favourable recommendation for a customer who will not default is 0.775, while the probability of a favourable recommendation for a customer who will eventually default is 0.15.
The bank wants to maximize its expected profit.
a. Construct a decision tree.
b. Calculate and interpret EVSI.
Adapted from: Albright, S. and Winston, W., 2019. Business Analytics: Data Analysis and Decision Making. 7th ed. Cengage Learning.

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