Tutorial 7 - Decision Tree Analysis Flashcards
What does a square represent in a decision tree?
a decision point (controlled)
What does a circle represent in a decision tree?
an uncertainty point (uncontrolled)
How are costs calculated at the end of the forward pass?
Summate the costs for each branching option (add them up)
How are probabilities calculated at the end of the forward pass?
Multiply all the probabilities together on that particular branch
How do you check you have done the forward pass correctly?
The sum of all probabilities should equal 1.0
How do you initiate the backwards pass?
(Branch 1 cost x Probability) + (Branch 2 cost x probability) etc.
How does the backwards pass change if there are more than two branches?
It does not change, the cost of the uncertainty point becomes the sum of:
(branch 1 cost x probability) + (branch 2 cost x probability) + …
How is the backwards pass completed at the decision point? (Beginning)
The lowest price from the first branching options calculated in the backwards pass is written into the controlled decision point box.
What does the end price represent?
The ‘mean average’ cost, a likely representation of the cost
How do you justify the decision from a decision tree?
- Identify the least ‘cost risk/expectation’ option
- Comment on whether the probability of poor result supports the choice (use a high monetary value and probability to justify this)
What is the ‘probability of poor result’?
The probability of a poor outcome happening, for example a high price
What are reasons for an organisation to reject the findings of a decision tree?
- Decision tree only considers very basic financial case
- PESTLE factors need to be considered
- Other necessary information such as ‘running costs’ may not have been considered
