3.3.3 Decision Trees Flashcards
What is a decision tree diagram?
a quantitative method of seeing the different outcomes of a decision, to identify the most profitable decision
The net gain from a decision is identified and used to consider whether an investment is worthwhile
What are the findings for a decision tree based on?
Research-based estimates and probabilities are used to calculate likely outcomes
What are the key elements in a decision tree? 4
Decision points
Outcomes
Probabilities
Expected monetary values
How are decision points illustrated in a decision tree diagram?
As squares
How are outcomes illustrated in a decision tree diagram?
As nodes (circles)
What is the rule for probability
It must add to 1
How are probabilities predicted?
Specialists do this so dw
What are the flaws with the probabilities used
They’re not guaranteed, just predicted
How is the expected monetary value calculated for each decision?
Find the average for the amount of profit created
E.g times 0.7 by 420k
Then 0.3 x (24k)
Then add those
EMV = 286800
How is net gain calculated?
EMV - initial cost of decision
What do you do when finding out the net gain of each option?
Compare each option n cross out the one with a lower net gain
What are the advantages of using a decision tree? 4
- Easy to visualise options and outcomes + to make
2.Handles uncertainty: u can add probabilities, helping manage risk/ uncertainty - Helps with objectivity: Decision trees focus on researched facts , leading to rational, informed choices.
- Includes both quantitative and qualitative factors.
What are the limitations of using a decision tree? 4
- Expected values don’t represent actual revenue
- Takes skill to construct
- Based on estimates
- Qualitative elements like HR isn’t considered
For me (visual aid x)
