Decision Trees

Question 1

What is a decision tree?

Answer 1

A technique that is used to aid the decision making process

Question 2

What does a decision tree show?

Answer 2

The likely financial return for undertaking each of the options, combines risk with reward

Question 3

What is the decision based on?

Answer 3

• The probability of a particular outcome

- The estimated monetary reward of a given option

Question 4

What is advantage of decision trees?

Answer 4

• Visually drawn - allows to see options available
• Quick and therefore cost effective
• Probabilities show level of risk involved

Question 5

What are the disadvantages of decision trees?

Answer 5

• Depends on the accuracy/reliability of figures used - usally guesses so inaccurate
• Person drawing it may alter probabilities to suit their interest
• Difficult to guage monetary reward
• No mention of time period
• No human element - how it will effect employees

Question 6

How do you work it out?

Answer 6

1. times EMB by probabilty
2. add up two numbers
3. minus cost / add reward
4. pick most favourable outcome