ID : 1021
Studies ; Models ; Management science ; Decision trees  ; Decision analysis
It is now well-known that under a set of decision tree rationality assumptions expected utility (EU) is the only appropriate model for evaluating alternatives in a decision tree.  Surprisingly, a much weaker set of assumptions than hitherto presented in the literature is required to justify the use of EU in decision tree analysis.  A note shows that a simple rule that is widely used in decision tree constructions, together with the usual folding back procedure, is sufficient to justify the independence principle, the critical conditions for EU.  The note requires only that the decision maker accept interchangeability of consecutive event nodes and the possibility of folding back as an appropriate method of analysis.  The folding-back procedure need only calculate certainty equivalents according to whatever preference model the decision-maker uses, and does not need given probabilities, or a multiplications rule for those.  The result is therefore obtained with a weaker set of assumptions.
Folding back in decision tree analysis, Sarin, Rakesh; Wakker, Peter, Management Science, 40:5, May 1994
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