The American public largely blamed irresponsible behavior on Wall Street for the 2008 financial crisis. In response, the federal government put in regulations to monitor banking activity more closely. Unfortunately, these regulations have had unintended consequences. People who work in financial inclusion argue that current regulations make it difficult for banks to offer affordable products and services to low-income clients. Banks agree and are calling for deregulation so they can offer affordable services to this population. A Fletcher alumna working for the government has reached out to you as a business practitioner for your advice on evaluating their options. She missed out on the decision analysis courses and is relying on you for this valuable insight. Her office estimates that if financial inclusion increases, more people will be able to manage their money in the formal economy, resulting in benefits of $600M. The probability of this happening if the government deregulates is .60. If financial inclusion remains stagnant, the wasted resources spent on trying to get a bill passed would cause a loss of $50M. Many members of Congress believe that banks if deregulated, will not offer more affordable services and are more concerned about the potential of a future financial crisis. If there is another financial crisis, the loss will be $500M. If regulation remains the same and there is no crisis, the payoff is $0. The likelihood of another financial crisis if banks are deregulated is .70. If the current regulations remain in place, this probability is .25. (a) Draw a decision tree for your colleague based on the information given above. Include all payoffs and probabilities. (b) Solve the decision tree. What do you recommend the government do? (c) Suppose she reveals that the government has new data analytics software that helps it regulate banks more effectively but can only be used with the existing regulatory structure. This technology provides a warning of potential crises early enough that regulators can take preventative action. However, the technology is not perfect. If there is a crisis, the probability that there will be a warning is .98. If there is no crisis the probability of getting a warning is .10. Use Bayes theorem to find the probability of a financial crisis when there is a warning. (HINT: You may want to use tree flipping as you will also need the probability of getting a warning for part (d)). (d) Create a new decision tree that incorporates the information from part (c) to include the possibility of a warning before the possibility of a crisis if the banks remain regulated. If there is a warning before a crisis, the loss is now half as much as it would be without the warning as there is time to take action that reduces the damage. Solve this decision tree. What should the government do now? The American public largely blamed irresponsible behavior on Wall Street for the 2008 financial crisis. In response, the federal government put in regulations to monitor banking activity more closely. Unfortunately, these regulations have had unintended consequences. People who work in financial inclusion argue that current regulations make it difficult for banks to offer affordable products and services to low-income clients. Banks agree and are calling for deregulation so they can offer affordable services to this population. A Fletcher alumna working for the government has reached out to you as a business practitioner for your advice on evaluating their options. She missed out on the decision analysis courses and is relying on you for this valuable insight. Her office estimates that if financial inclusion increases, more people will be able to manage their money in the formal economy, resulting in benefits of $600M. The probability of this happening if the government deregulates is .60. If financial inclusion remains stagnant, the wasted resources spent on trying to get a bill passed would cause a loss of $50M. Many members of Congress believe that banks if deregulated, will not offer more affordable services and are more concerned about the potential of a future financial crisis. If there is another financial crisis, the loss will be $500M. If regulation remains the same and there is no crisis, the payoff is $0. The likelihood of another financial crisis if banks are deregulated is .70. If the current regulations remain in place, this probability is .25. (a) Draw a decision tree for your colleague based on the information given above. Include all payoffs and probabilities. (b) Solve the decision tree. What do you recommend the government do? (c) Suppose she reveals that the government has new data analytics software that helps it regulate banks more effectively but can only be used with the existing regulatory structure. This technology provides a warning of potential crises early enough that regulators can take preventative action. However, the technology is not perfect. If there is a crisis, the probability that there will be a warning is .98. If there is no crisis the probability of getting a warning is .10. Use Bayes theorem to find the probability of a financial crisis when there is a warning. (HINT: You may want to use tree flipping as you will also need the probability of getting a warning for part (d)). (d) Create a new decision tree that incorporates the information from part (c) to include the possibility of a warning before the possibility of a crisis if the banks remain regulated. If there is a warning before a crisis, the loss is now half as much as it would be without the warning as there is time to take action that reduces the damage. Solve this decision tree. What should the government do now