Theme 3 Topic 8 - Decision Trees Flashcards
Define Decision Tree
Diagrams which set out all the options available when making a decision and an estimate of their likelihood of occurrence
What do decision trees set out?
A logical process for making a decision
What do decision trees explore and try to determine?
The various options and tries to determine the likelihood of success/failure of each option
What does the square node represent?
The decision a business must make
What do the circle nodes represent?
The possible outcomes
On the line from the square to the circle, what is the number?
The cost of the decision/investment
On the lines from the circles, what is the decimal?
The chance of that outcome occurring
At the end of the lines from the circles, what is the number?
The expected monetary value of the decision, Revenue
Expected Value =
Probability of Each Outcome x Revenue (these are then added together for each possible outcome)
Net Expected Value (Net Gain) =
Expected Value - Cost of Decision
What are three advantages of decision trees?
Technique allows for uncertainty, Forces managers to consider all possible options, Problems are set out clearly encouraging a logical approach
What are four disadvantages of decision trees?
Gathering data is likely to involve guess work, New problems mean past occurrences can’t be used to base estimated probabilities/outcomes on, Outcome can be biased if influenced, Can lead to the failure to consider qualitative factors
