Decision Trees

Question 1

What does the decision tree do?

Answer 1

Aid the decision making progress by showing the likely financial return for undertaking each option/ possible decision.

Question 2

What do decision trees combine?

Answer 2

The risk and the key return.

Question 3

What two aspects is a decision based upon?

Answer 3

1) the probability of a particular outcome (the risk)
2) the estimated monetary reward of a given option (the reward)

Question 4

What does a square represent in the diagram?

Answer 4

A decision - to do one thing or another. The number of lines draw from square represent the number options.

Question 5

What does a rifle represent in the diagram?

Answer 5

The possible outcomes once an option is select. Can be simple such as success or failure. Whatever the outcomes once a decision is made, a one represents each such outcome.

Question 6

What do parallel lines on an option mean?

Answer 6

An option that has not been selected.

Question 7

How do you convert info into a diagram?

Answer 7

1. Draw initial decision. Draw a square to represent this. Eg to build or not to build
2. Consider how many outcomes there are of building. Eg to outcomes: houses built and sold successfully OR houses build and not sold. Draw a circle to represent the outcomes + label each option.
3. State (usually below decision line) the probability of that outcome occurring
4. Estimated monetary value of a particular outcome - put to right of outcome