11. Decision Trees

Question 1

<p>How is Decision Tree defined?</p>

Answer 1

<p>a technique which shows all possible outcomes of a decision. the name comes form the similarity of the diagrams to the branches of trees</p>

Question 2

<p>What are decision trees?</p>

Answer 2

<p>- A decision tree is a method of identifying all the alternative outcomes for a decision so that they can be compared to the results of undertaking an action.
<br></br>- Numerical values are given to each potential option, then calculations can be used to determine the best outcome.</p>

Question 3

<p>What are the different features of a decision tree?</p>

Answer 3

<p>- Decisions Points
<br></br>- Outcomes
<br></br>- Probability or Chance
<br></br>- Expected Monetary Value</p>

Question 4

<p>What is a Decision Point?</p>

Answer 4

<p>where a decision needs to be made. Represented by a square.</p>

Question 5

<p>What is a Outcomes?</p>

Answer 5

<p>points where the different possible outcomes. Represented by circles and referred to as chance nodes.</p>

Question 6

<p>What is a Probability or Chance?</p>

Answer 6

<p>- the likelihood of success or failure of an outcome.
<br></br>- These probabilities will be assessed based on market research data and previous experience (using a businesses backdata)</p>

Question 7

<p>What is Expected Monetary Values?</p>

Answer 7

<p>this is the financial outcome of the decision</p>

Question 8

<p>How can you Calculated the Expected Monetary Values (EMV)?</p>

Answer 8

<p>EMV = S + F
<br></br>
<br></br>S = probability of success x expected profit if successful
<br></br>
<br></br>F = probability of failure x expected profit if it fails
<br></br>
<br></br>If they are numerous outcomes you simply add all value of EMV together instead</p>

Question 9

<p>What are the advantages of Decision Trees?</p>

Answer 9

<p>- Can be applied to complex scenarios to allow visual comparison
<br></br>- May allow possible courses of action to be identified that have been considered.
<br></br>- Numerical values helps decision making
<br></br>- Helps identify the risks associated with decisions, allowing management to them to separate important decision from those not important</p>

Question 10

<p>What are the Disadvantages of Decision Trees?</p>

Answer 10

<p>- Due to the reliance on probabilities, may not be accurate.
<br></br>- Time lag – by the time decision made, information may be out of date
<br></br>- It can be time consuming, although computerised modelling can be quicker.
<br></br>- Decision makers may have an agenda which means they manipulate the probabilities to distort the results.</p>