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Decision Trees, Payoff Tables, and Expected Value
Grade Level
CLEP
CLEPMGT.056 Decision Trees, Payoff Tables, and Expected Value
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A sales operations manager receives a payoff table for sales territory redesign. The listed state probabilities are Productivity rises = 0.60, Productivity flat = 0.25, Productivity falls = 0.10. Payoffs are Redesign territories: Productivity rises $26,000, Productivity flat $5,000, Productivity falls -$9,000; Keep territories: Productivity rises $9,000, Productivity flat $9,000, Productivity falls $9,000. Which response best reflects sound expected-value practice?
A
Pause before recommending; the listed probabilities sum to 0.95, so the table must be corrected before computing expected value.
B
Choose Redesign territories because the first row of a payoff table is normally the preferred action, organizing the plan around the selected option.
C
Average the payoffs without probabilities because probability assumptions are optional in expected value, treating the result as the main basis for action.
D
Choose the alternative with the largest single payoff and ignore the probability column, aligning the initial plan to that one factor.
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