3.3.3 Decision trees

Question 1

what is a decision tree?

Answer 1

traces the alternative outcome of a decision, results can be compared and the business can decide which option is more profitable

Question 2

what is the expected value?

Answer 2

the financial value of an outcome
(EV = outcome x probability)

Question 3

what is net gain?

Answer 3

the value gained from taking a decision
(adding EV of each outcome - costs of the decision)

Question 4

strengths of decision trees are…?

Answer 4

-choices are set out in logical ways
-potential options/choices are considered at the same time
-use of probabilities enables the ‘risk’ of the options to be addressed

Question 5

weaknesses of decision trees are…?

Answer 5

-probabilities are just estimates so they are always prone to error