3.3.3 decision trees

Question 1

decision trees

Answer 1

a technique that shows all possible outcomes of a decision to be profitable, minimise risk and have a greater return by calculating net gain of decision to decide if its worthwhile. it uses estimates and probabilities to calculate likely outcomes when faced with choices.

Question 2

expected value EV formula

Answer 2

probability x its result/outcome
(do for each e.g. success and failure)
then add them all up

Question 3

net gain formula

Answer 3

expected value - the cost of the decision

the higher this is the better

Question 4

pros of decision trees

Answer 4

• this is a logical approach. this is cuz it uses quantitative data as it’s based on numbers. good as using numerical values in decision making improves the quality of decision making. this also makes it clear so a solution can be identified.
• this approach is objective. this is good because a decision is based on a final figure (whichever has the highest net gain) so is not open for discussion.
• good as it considers the costs of each decision. this also means that the business will be able to take into account the risks associated with decisions.

Question 5

cons of decision trees

Answer 5

• this method does not account for qualitative data. this is bad because it only looks at the expected profits for that decision. this impacts on stakeholders e.g. shareholders or employees may not agree with the idea.
• these are just estimates. this means that the probabilities are based on judgements and so if they are wrong we will get inaccurate net gains and therefore leading to wrong and distorted decisions being made. this means this method will only be beneficial based on how accurate the estimates are made by the b
• this technique is very complex, time-consuming and expensive. this is because it may be difficult to draw a decision based on assumptions. if takes a lot of time there is an opportunity cost, as b is using up valuable resources that could have been more efficiently used elsewhere.

Question 6

eval - you should use decision trees because

Answer 6

• a b should use it if they are experienced and have knowledge or have faced a similar type of decision
  before or have done lots of decision trees like this before. this means they will have a good understanding of it.

Question 7

eval- you should not use decision trees because

Answer 7

• if the b is making a brand new decision they have never made before or have no experience in it then should avoid this method as they could be off with their probabilities. wont be accurate.
• if the b is making a long term decision then they should avoid just solely using decision trees because they have a lot of other factors to consider such as stakeholders and qualitative data.
• if the b has a lack of trust in the data then they should not use the decision tree to make their decisions.