(A) Construct a Decision Tree to Help Her Model Her

question 98

Essay

(A) Construct a decision tree to help her model her option decision making. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities.
(B) What is the optimal decision making policy regarding the options in all possible scenarios over the next two years?
(C) What is the expected value of the stock options? Ignore the time value of money (assume no discounting of future payoffs)
(D) If her estimates of the increases/decreases or probabilities are inaccurate, could the options have a negative EMV?

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Definitions:

Tools of Economics

The set of methodologies, techniques, and concepts used by economists to analyze and understand the workings of economic systems.

Economics

The academic discipline that explores how people, government entities, companies, and countries decide to distribute limited resources to meet their endless desires.

Systematic Mistakes

Errors that individuals consistently make due to predictable psychological biases, often studied in behavioral economics.

Decision Making

The process of selecting among various alternatives or options, typically aiming to achieve the most favorable outcome.