Dmd Case Analysis of Making a Decision of Buying a House

Topics: Decision theory, Decision tree, Decision making Pages: 6 (1213 words) Published: October 23, 2011
Assignment Form

|Course: | Data, Model and Decision |

|Instructor: | Dr. Feng Haolin |

|Homework: |Decision Analysis |

|Name: | Group 1. Li Yuechuan/ Pankaj Malhotra/ Liang Yuan/ Wu Zhuhua/ Tan Jing/ Gu Junling |

|Student ID No.: | |

|Class: |11FB |

STUDENT DECLARATION

I declare that this assignment is my own work, which all sources of reference are acknowledged in full and it has not been submitted for any other course.

Signature:…………………… Date:…………

Content:
Part 1. Case Description----------------------------------------------------------------------------- 3 Part 2. Decision Making Analysis-------------------------------------------------------------------4 Part 3. Decision Tree----------------------------------------------------------------------------------5 Part 4. Sensitivity Analysis---------------------------------------------------------------------------6 Part 5. Conclusion-------------------------------------------------------------------------------------8

Part 1. Case Description
The case is about a house that has been on sale in Shaker Heights, Ohio, for one day. Debbie and George Calvert are seriously thinking of making an offer towards the house, which has been valued at $400,000. Their broker has advised them to make an offer of as close to the asking price as possible, as there are around 20 other interested potential buyers. Debbie has assigned an additional $10,000 as the ‘emotional value’. That is, whereas the fair market value of the house is $400,000, the house would be worth $410,000 to them. The couple has decided to make one of the three offers listed in the table below. In case of there being multiple bids, they will have to rethink on whether to withdraw the offer, submit the same offer or increase the offer by $5000. In order to be able to construct a decision tree to help her make the optimal decision, Debbie has assigned a few probabilities as follows:

|Event |Probability | |Bidding price |One bidder (0.30) |Multiple bids (0.70) | |$390,000 |0.40 |0.20 | |$400,000 |0.60 |0.50 | |$405,000 |0.90 |0.70 | |$395,000 | |0.30 | |$410,000 | |0.80 | | | | |

Part 2. Decision-making analysis
The basic knowledge in decision tree: Decision analysis is a logical systematic way to address a wide variety of problems involving decision-making in an uncertain environment. A Decision Node represents a decision in the decision tree; we use a square box to mark it. An uncertain event is represented with a small circle called an Event...
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