3.3.3 Decision Trees

Question 1

What are decision trees?

Answer 1

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

Question 2

Probability

Answer 2

The chance of an outcome happening

Question 3

Expected value

Answer 3

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

Question 4

Net gain

Answer 4

The value to be gained from taking a decision.

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

Question 5

Advantages of using decision trees

Answer 5

• 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

Question 6

Limitations of using decision trees

Answer 6

• Probabilities are estimates and may be prone to bias and error
• No qualitative data
• Identifies risk but doesn’t prevent it from occurring