Decision Trees

Question 1

What are decision trees?

Answer 1

A decision tree is a tool/model to help a business make a decision

Question 2

What are three key inputs for decision trees?

Answer 2

1) cost of the decision
2) probability of success
3) end payoffs (financial or Monetary outcomes)

Question 3

What is the EV (expected value) variation calculation?

Answer 3

Final payoff X probability =EV

Question 4

What is the EV course of action calculation?

Answer 4

(All variations added together)
EV1 + EV2 = course of action

Question 5

What is the net gain calculation?

Answer 5

EV (course of action) - cost (course of action) = Net gain

Question 6

Pros of using decision trees?

Answer 6

-logical approach, using quantitative data
-objective (scientific side)
(Justifiable to stakeholder to buy in)
-includes cost of each course of action
(Use to make tactical decision/faced similar type of decision before)

Question 7

Cons of using decision trees?

Answer 7

-doesn’t account for any qualitative data
(Impact on stakeholders or trade off?)
-only as good as the predictions
(Possibilities, final payoffs)

Question 8

Which types of Businesses should use decision trees?

Answer 8

Businesses which need to make tactical decision/faced similar type of decision before

Question 9

Which types of businesses should not use decision trees?

Answer 9

Businesses which face a brand new decision (could use intuition instead), if they have a lack of trust in the data or if it’s a strategic decision (eg long term decisions may not be worth only using a decision tree)