## Assignment 9

This assignment will provide you with an opportunity to practice decision trees.

## Risk Modeling with Decision Trees

Blackstone Partners, an accounting firm, receives 182,673 email messages annually. The firm presently does not employ any filters for its message traffic. Historically, there has been an average of 11 successful data thefts through social engineering or phishing per year. Each intrusion incident results in an estimated aggregate loss of $12,650 which includes lost employee time, data recovery costs, and customer payouts.

The newly hired Executive Director of Security, Janice Lazzotti, proposes the installation of a machine learning based email intrusion detection product from Looft Security. The product carries an initial cost of $49,500 and an annual maintenance cost of $4,500. The estimated useful life of the security system is estimated to be three years. At that time, it is anticipated that it will need to be replaced with a new solution.

Based on an analysis conducted by a Looft Security, the chance that an intruder will be able to bypass the detection system with a message is 0.000012. In case of successful bypass, there is a 28% chance that the damage will be $50,000, a 52% chance that it will be $100,000, and a 15% chance that it will be $200,000. Otherwise, the bypass has no consequence.

You are to weigh whether it is a financially sound decision to purchase the security product. Build a decision tree and then instrument the analysis with a model using Google Sheet. Your model must be flexible so that different scenarios can be considered. Do not hard code any data! It must clearly show which decision to make -- and that should change as the assumptions on costs, probabilities, life, etc. change.

To submit this assignment, upload a clickable and public

The newly hired Executive Director of Security, Janice Lazzotti, proposes the installation of a machine learning based email intrusion detection product from Looft Security. The product carries an initial cost of $49,500 and an annual maintenance cost of $4,500. The estimated useful life of the security system is estimated to be three years. At that time, it is anticipated that it will need to be replaced with a new solution.

Based on an analysis conducted by a Looft Security, the chance that an intruder will be able to bypass the detection system with a message is 0.000012. In case of successful bypass, there is a 28% chance that the damage will be $50,000, a 52% chance that it will be $100,000, and a 15% chance that it will be $200,000. Otherwise, the bypass has no consequence.

You are to weigh whether it is a financially sound decision to purchase the security product. Build a decision tree and then instrument the analysis with a model using Google Sheet. Your model must be flexible so that different scenarios can be considered. Do not hard code any data! It must clearly show which decision to make -- and that should change as the assumptions on costs, probabilities, life, etc. change.

To submit this assignment, upload a clickable and public

**URL to your spreadsheet to Blackboard plus a PDF or JPG of your decision tree.**## Grading Rubric

- 10% | all of the provided parameters are in cells and cell references are used in formulas; new values can be provided
- 05% | additional years can be added and model functions properly
- 10% | final decision is easy to see and clear
- 05% | the model is uncluttered and easy to navigate
- 40% | model provides the correct answer and calculations are correct
- 10% | model is easy to read and modify; result is clearly labeled
- 20% | properly formatted decision tree with chance nodes and payoff nodes

## Bonus Problem: Bayesian Analysis (*+30 Points*)

John wants to build a small driving range. He believes the chance of building a successful range is 40%. His friend Alice suggested that he conduct a survey. There is a 0.9 probability that the survey will be favorable if the driving range is a success. There’s a 0.8 probability that the survey will be unfavorable if the driving range is not a success. What is the chance of a successful range if the market survey is favorable?

## Scoring

*Total Number of Earnable Points*: 100 (+30 Bonus Points)

*Approximate Time to Complete*: 2 hours (+1 hour for bonus problem)

*Due Date*: see Content or Blackboard