Utility-Tree Analysis
A structured decision-making framework that involves identifying options and outcomes, determining the perspective of analysis, and constructing scenario trees to evaluate utility.
THE IDEA
Utility-Tree Analysis
The source describes an eight-step process; only the first three steps are included here.
- Identify the options and all possible outcomes to be analyzed. The options must be mutually exclusive but not collectively exhaustive. The outcomes, however, must be both.
- Identify the perspective of the analysis. Ask "From what perspective am I analyzing the utility?" Write this above the tree.
- Construct a set of scenario trees that clearly depicts the options and outcomes. Each option is represented in a separate tree. For example, a jelly bean tree might contain three options (three bets, three trees) and nine possible outcomes.
When to use it
Evaluating investment portfolios with multiple assets and various market conditions.
Comparing different business strategies (e.g., expand, maintain, divest) with uncertain outcomes.
Deciding on a career path by considering job offers with different salary ranges, growth potential, and risks.
Analyzing betting scenarios in gambling or sports predictions.
FROM THEORY TO EVERYDAY LIFE
In practice
Jelly Bean Bet
Three bets on the color of a jelly bean drawn from a jar: red, green, blue. Each bet has three outcomes: win $10, win $5, or lose $1. The perspective is the bettor's profit, and the scenario tree models each option's possible outcomes.
A MOMENT TO REFLECT
Put it to work.
When making a decision, have you identified all possible outcomes? Are they collectively exhaustive and mutually exclusive?
How does the perspective of analysis (e.g., bettor's profit vs. house's profit) change the utility calculation?
What are the limitations of using scenario trees for complex decisions with many options and outcomes?
CONTINUE THE CONVERSATION
Source texts
- The Thinkers Toolkit by Morgan D Jones