Decision trees

• What is the purpose of decision trees in business?

  To help make decisions
• What are the key inputs into a decision tree?

  Cost, probability of success, and payoffs
• What shape represents a decision in a decision tree?

  A square or box
• What are the two ways a business can launch a product in the example?

  • Launch using advertising
  • Launch using sales promotions
• What do the circles in a decision tree represent?

  Courses of action
• What are the two demand variations mentioned in the example?

  High demand and low demand
• What are the key formulas to calculate in decision trees?

  1. Expected value of a variation
  2. Expected value of a course of action
  3. Net gain
• How do you calculate the expected value of a variation?

  Multiply final payoff by probability
• What are the pros of using decision trees?

  • Logical approach
  • Uses quantitative data
  • Includes costs of actions
• What are the cons of using decision trees?

  • Ignores qualitative data
  • Predictions must be accurate
  • Short-term focus
• When should decision trees be used?

  When faced with familiar decisions
• When should decision trees not be used?

  For brand new or strategic decisions
• What is a key factor to avoid using decision trees?

  Lack of trust in the data
• What should be considered alongside decision trees?

  • Stakeholder impact
  • Qualitative data
  • Long-term sustainability