Decision trees Flashcards
What are decision trees?
They are graphical representations of business decisions, they consider the choice in question, the probability of it’s success, and the potential financial gain.
What three crucial pieces of information do decision trees show businesses?
Available options.
Possible outcomes
Where business decisions need to be made.
What is the end goal of decision trees?
To show the business the probability and value of success or failure for a given action. They usually provide a business with an option that has the highest probability of success, but this depends on the market and product.
What is the EMV? How can you ascertain the EMV of a particular option?
The EMV, or expected monetary value of an outcome is the probability of the outcome occurring, multiplied by the pay off the business can expect to receive.
To find the EMV of a particular option, you add the EMVs of the different outcomes together.
What is net gain?
The financial gain after initial costs have been subtracted. Net Gain = EMV - initial costs.
What does a square on a decision tree represent?
A decision node, or business decisions that need to be made.
What do lines coming out of squares represent?
The possible courses of action and the costs of each action.
