Chapter 54- Decision Trees

Question 1

Decision tree

Answer 1

Firms are faced with a multitude of decisions which can be made using a decision tree. A decision tree is a method of tracing the alternative outcomes of any decision . The likely results can then be compared so that the business can find the most profitable alternative.

Question 2

Decision tree features

Answer 2

A decision tree has a number of different features:
1. A square = a decision point – The decision marker has to
choose between certain courses of action

2. A circle = a chance outcome i.e. a possibility of something
   happening
3. Probability- for each possible outcome, a probability value is
   given. If there is no chance, the probability will be 0.
4. At the end of the decision tree, there is an expected
   monetary value which is often defined as a profit or loss or
   revenue.

Question 3

Advantages and Disadvantages of a decision tree

Answer 3

Advantages:
• May show possible causes of actions not thought of before
• Involves numerical values being put on decisions = improve
results
• Forces management to take in risks involved in decisions +
help separate important and unimportant risks.

Disadvantages:
• Info is not exact, based on probabilities which are estimated
• Decisions only take into account quantitative data but not
legal constraints or people’s opinions = qualitative data is
important.
• Takes time to make decisions so data may go out of date
• Time-consuming + uses up valuable business resources
however computers can be used to analyse data = saving
time
• Data can be manipulated by decision maker = manager
could be bias
• Not able to take into account dynamic nature of the
business e.g. sudden change in economic climate.