3.3 Decision trees

Question 1

Decision trees

Answer 1

A quantitative method of tracing the outcomes of a decision so the most profitable decision can be made.

Question 2

What is a decision tree used for?

Answer 2

Help managers make decisions
Uses estimates and probabilities to calculate likely outcome
see if net gain is worth it

Question 3

What’s the square?

Answer 3

A decision node

Question 4

A decision node

Answer 4

Where a decision has to be made.

Question 5

What’s the square?

Answer 5

A chance node

Question 6

A chance node

Answer 6

Used where there are a number of possible outcomes

Question 7

What does the line show?

Answer 7

Show options and possible outcomes.

Question 8

Advantages of decision trees

Answer 8

Reveal options that haven’t previously been considered.
Consider risks.
Deep research of options before implementing.

Question 9

Disadvantages of decision trees

Answer 9

Time consuming to gather a significant amount of data.
Constructed using estimates so does not take into account external factors.
Time lag between constructing and implementing makes it unreliable.