Decision Trees

• what is a decision tree?

  a mathematical model used to help managers make decisions when faced with choices
• why use decision trees?

  -lets you see all the outcomes

  -it will see if a decision is worth while

  -as it used estimations and probabilities it is a likely outcome
• what does a square mean?

  a decision node
• what does a circle mean?

  chance/ option nodes
• what does a line mean?

  probability of that decision
• what is the definition of expected value?

  the financial value of an outcome calcualted
• what is the equation for expected value?

  estimated financial effort x probability
• what is the definition of net gain?

  the value to be gained from making a decision
• what i the equation for net gain?

  add together the total expected value of each outcome deducting the costs associated with that decision
• what is the definition of probability?

  the percentage likliness that an outcome will occur
• what are the ADS of decision trees?

  -give a logical decision making approach

  -turns all data into numerical values which makes it easier to compare

  -likely costs are considered as well as potential benefits
• what are the DADS of decision trees?

  -may not consider the qualitative factos

  -it is only an estimation

  -relies on data quality

  -external environment changes quickly meaning that data will quickly become oudated
• What does the evaluation depend on?

  -ethics

  -external environment

  -missions and objectives

  -competitors

  -resource constraints