Decision trees

• A decision tree is a quantitative method of tracing the outcomes of a decision so that the most profitable decision can be identified

  •  Research-based estimates and probabilities are used to calculate likely outcomes
  • The net gain from a decision can be identified and used to consider whether an investment is worthwhile
• • Points where decisions need to be made are represented by squares
  • Square A represents the fact that a choice is required on opening a new store or expanding the website
  • Points where there are different outcomes are represented by circles called nodes
  • Circles B and C represent points at which the different options have a range of outcomes - success or failure

  
• Limitations of Using Decision Trees

  • take significant amounts of time to gather reliable data
  • Constructed using estimates cannot include all possible eventualities
  • human resource impacts are not considered which may affect the probability of success of a decision
  • The time lag between the construction of a decision tree diagram and the implementation of the decision is likely to further affect the reliability of the expected values