3.3.3. Decision Trees

Question 1

Decision tree

Answer 1

Diagram showing options and possible outcomes involved in making a decision along with the probabilities of outcomes occurring

Question 2

Expected value

Answer 2

Av. outcome expected flowing chance of event.
Expected return X probability

Question 3

+ves of decision trees

Answer 3

-Technique allows for uncertainty
-Forces managers to consider all options
-Problems clearly set out, encouraging logical approach
-Quantification of problems encouraged by dressing of trees

Question 4

-ves of decision trees

Answer 4

-Gathering data required is hard and likely to involve an element of guesswork
-New problems mean previous occurrences can’t be used to base estimated probabilities and outcomes on, reducing reliability of data
-Bias can be introduced with whoever is is estimating probabilities and outcomes if they wish to influence outcome of decisions
-Decision trees lead to a failure to consider qualitative aspects of decisions.