3.3.3 decision trees

Question 1

actual values

Answer 1

although known as ‘actual values’ or ‘payoffs’ these are the forecasts of the net cash flow which result from following a sequence of decisions and chance events through a decision tree. They should always be shown at the ends of the branches of the tree

Question 2

expected values

Answer 2

these are the forecast actual values adjusted by the probability of their occurrence. Although called ‘expected’, they are not the actual cash flows which result. Expected equals actual times probability

Question 3

Net gains

Answer 3

subtracting the initial outlay from the expected value to find out whether or not a decision is likely to produce a surplus

Question 4

Node

Answer 4

a point in a decision tree where chance takes over. It is denoted by a circle, and at that point it should be possible to calculate the expected value of this pathway

Question 5

Probability

Answer 5

the likelihood of something occurring