3.3.3 Decision trees

Question 1

define decision tree

Answer 1

A technique which shows all possible outcomes of a decision

Question 2

what are decision trees?

Answer 2

Quantitative approach as the outcomes are expressed as numbers and Pictorial as it is a diagram
-a method of tracing alternative outcomes of any decisions, which allows for results to be compared & decide which is most profitable
-based on historical data

Question 3

what are the 4 features of a decision tree?

Answer 3

Decision points - a square
Outcomes - circles ‘chance nodes’
Probability - values like 0.5 that when sumed up = 1
Expected monetary value - the financial outcome of a decision

Question 4

how do we calculate expected monetary value?

Answer 4

To get the EMV for the options:
EV = (Probability X expected profit of success) +(probability X expected loss of failure)

if there are more outcomes then just continue to follow the formula

Question 5

when given the cost of the projects do we subtract it from the EMV?

Answer 5

Yes

Question 6

Give three advantages of using decision trees

Answer 6

-Constructing the tree diagram may show possible courses of action not previously considered
-They involve placing numerical values on decisions -> improve results
-They force management to take account of the risks involved in decisions and help to seperare important and unimportant risks

Question 7

give three limitations of using decision trees

Answer 7

Based on predicted data and potential impact is estimated
Doesn’t account for unforeseen costs and circumstances
Large degree of uncertainty about any situation that a decision tree might be used for so the benefits of adding numbers so might not be accurate
time consuming & uses up business resources