Decision Tree

• What is a Decision Tree?


  • A decision tree is a mathematical model used to help managers make decisions when faced with choices.
  • A decision tree uses estimates and probabilities to calculate likely outcomes. Calculating these estimates helps to decide whether the net gain from a decision is worthwhile.
• 4 step approach to decision trees

  1. Identify the options
  2. Add possible outcomes
  3. Add associated costs, outcome probabilities & financial results
  4. Calculate the expected values and net gains
• What is Expected Value?


  • The financial value of an outcome calculated by multiplying the financial result by its probability
• What is Net Gain?


  • The value to be gained from taking a decision. Calculated by adding together the expected value of each outcome and deducing the costs associated with the decision
• Decision Tree

  
• Ansoff Matrix Diagram

  
• The Ansoff Matrix, often called the Product/Market Expansion Grid, is a two-by-two framework used by management teams and the analyst community to help plan and evaluate growth initiatives. In particular, the tool helps stake holders conceptualize the level of risk associated with different growth strategies.