Decision Trees Flashcards
1
Q
What are Decision Trees?
A
- Shows possible business options
- Shows possible outcomes of these options
2
Q
How are Decision Trees applied?
A
- Applied where numerical data is available.
- Shows the probability of different consequences and the financial outcomes for decisions
3
Q
What do squares represent in Decision Trees?
A
- Decisions
4
Q
What do circles represent in Decision Trees?
A
- Uncertain outcomes
5
Q
What is Probability?
A
- The chance of an outcome happening
6
Q
What is Expected value?
A
- The financial value of an outcome
7
Q
How is Expected Value calculated?
A
- Estimated Financial Effect x Probability
8
Q
What is Net Gain?
A
- The financial value of a decision made
9
Q
How is Net Gain calculated?
A
- Adding the value together of the expected value of each outcome and deducting the cost of the decision made.
- EV+EV - Cost of Decision
10
Q
What are the benefits of using Decision Trees?
A
- Takes uncertainty into account
- Good basis for justification in the event of failure
- All options are carefully considered
- Encourages a logical approach for quantitative factors to be considered
- Most useful when similar situations have occurred before
11
Q
What are the drawbacks of using Decision Trees?
A
- Need to examine where figures have come from
- May be difficult to get meaningful data for successes or failures
- Less useful when it is a completely new problem or one-off strategic issues
- Qualitative factors should also be key in decision making
