Decision Trees Flashcards
What does a decision tree analysis combine? 2 things
Probability
Expected Pay-Off
What is probability?
The likelihood of an event occurring
How is probabilities measured as?
A decimal e.g 0.6
What is the expected value of an outcome?
The probability of the outcome occurring multiplied by the pay-off the business can expect to get.
How do you work out the Expected value of a course of action?
Add the expected values of the different outcomes together
What is net gain?
The financial gain after initial costs of the decisions have been subtracted.
How do you calculate net gain?
Expected value minus initial costs
What does a square represent in a decision tree?
A decision point
What do the lines coming from a square represent in a decision tree?
The possible courses of action and the costs of each action.
What does a circle represent in a decision tree?
That there are alternative outcomes for a course of action
What do the decimals on the lines coming out of the circles represent?
The probabilities of each outcome occuring
What does the values in £s represent in a decision tree?
The pay-off for the business if that outcome happens
What are 3 advantages of decision trees?
Makes managers work out and think about the probability and potential pay-off
Visual representation
Allows managers to compare options
What are 3 disadvantages of decision trees?
Quantitative data
Probabilities hard to predict
Wider range of outcomes
