Theme 3.3.3 Decision Trees

Question 1

What is meant by a decision tree?

Answer 1

Decision trees are mathematical models (or techniques) that set out all the options available for managers when making a decision, plus the possible outcomes of those decisions

Question 2

What does a square mean on a decision tree diagram?

Answer 2

This is the decision to be made

Question 3

What does a circle mean on a decision tree diagram?

Answer 3

Choice or option?

Question 4

Where do you write the probability of the outcome?

Answer 4

You write the probability of the outcome under the outcome

Question 5

What is meant by the expected value?

Answer 5

The financial value of an outcome calculated by multiplying the estimated financial effect by its probability

Question 6

What is the expected value calculation

Answer 6

result x probability = expected value

Question 7

Three advantages of using decision trees

Answer 7

• the diagram may highlight possibilities that had not previously been considered
• they require numerical values to be placed upon decisions -

Question 8

Three advantages of using decision trees

Answer 8

• the diagram may highlight possibilities that had not previously been considered
• they require numerical values to be placed upon decisions -this tends to require research, and thus improves results
• the method takes into account the risks involved in decisions, and makes decision-maker aware of them

Question 9

Five disadvantages of using decision trees

Answer 9

• the probabilities used are often estimated
• they do not take into account non-numerical factors e.g. legal constraints
• time lags may make numerical data out of date
• process can be quite time-consuming
• diagrams can become unmanageable for complex decisions