Statistics Case Study

Topics: Decision theory, Risk, Expected value Pages: 3 (764 words) Published: May 2, 2013

AB103 Statistical & Quantitative Methods
Semester 2 of 2009/2010

Problem Context:
This case problem is related to a property purchase strategy. The president of Oceanview is deciding whether to bid for a property to build and sell condominiums. However, this depends on whether the state can change the zoning of the property to permit construction of condominiums. Here, the decision is whether to bid for the property, and chance events are firstly, whether the bid can be successful, and secondly, whether the state will approve the zoning change. To assess the likelihood that the state will approve the zoning change, the president can hire a market research service. Hence, the president is facing another decision as to whether he wants to hire the market research service. As a result, if he chooses to hire the service, besides the two chance events mentioned above, there is another chance event concerning whether the market research predicts that the zoning change will be approved. The consequence is that the company will have different profits or losses. Data analysis:

Below is a timeline showing the sequence of events taking place from now to November where the results of whether the zoning change is approved will be released. Now
1 Jun
1 Aug
15 Aug
1 Sep
Market research results available
Deadline to submit bid
Announcement of winning bid
Announcement of zoning referendum results

Based on the sequence of events in the timeline, we can draw a decision tree showing all the decisions and chance events. A more detailed decision tree with probabilities for each state of nature will be illustrated in the appendix.

1. If no market research information is available, the expected value of submitting the bid would be a profit of $0.05 million, whereas the payoff of not submitting the bid would be 0. Therefore, to maximize profit, Oceanview should submit the bid. 2. If the market research is conducted...
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