3.3.3 Decision Trees Flashcards

1
Q

What are decision trees?

A

Mathematical models that set out all the options available for managers when making a decision, plus the possible outcomes of those decisions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Probability

A

The chance of an outcome happening

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Expected value

A

The financial value of an outcome calculated by multiplying the estimated financial effect by its probability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Net gain

A

The value to be gained from taking a decision.

Calculated by adding together the expected value of each outcome minus the cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Advantages of using decision trees

A
  • Use of probabilities allows business to see the risk of the decision
  • Options are laid out clearly and logically allowing for decisions to be made
  • Forces business to conduct research for costs, benefits and probabilities
  • Multiple options can be considered at the same time
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Limitations of using decision trees

A
  • Probabilities are estimates and may be prone to bias and error
  • No qualitative data
  • Identifies risk but doesn’t prevent it from occurring
How well did you know this?
1
Not at all
2
3
4
5
Perfectly