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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

In a decision tree for a Chennai general insurer's choice of whether to enter a new motor segment, which feature correctly describes the standard convention for the nodes?

Squares denote decisions that management controls, and circles denote chance events whose branches carry probabilities. The tree is then evaluated by rolling back from the payoffs on the right towards the first decision on the left.

  1. ASquare nodes are chance events and circles are decisions
  2. BSquare nodes are decisions under management control and circles are chance events with probabilitiesCorrect
  3. CBoth squares and circles are decisions, differing only in cost
  4. DTriangles show decisions and squares show final payoffs
  5. Circles show decisions and are evaluated by working left to right

Explanation

By convention squares are decision points the firm controls and circles are chance nodes whose branches carry probabilities. Trees are evaluated by rolling back from right to left.

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