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Decision Tree Analysis
October 4, 2019 by Prachi M Leave a Comment
Definition: Decision tree analysis is a powerful decision-making tool which initiates a structured
nonparametric approach for problem-solving. It facilitates the evaluation and comparison of the
various options and their results, as shown in a decision tree. It helps to choose the most
competitive alternative.
It is a widely used technique for taking crucial decisions like project selection, cost management,
operations management, production method, and to deal with various other strategic issues in an
organization.
Content: Decision Tree Analysis
1. What is a Decision Tree?
2. Terminologies Used
3. Steps
4. Example
5. Advantages
6. Disadvantages
7. Conclusion
What is a Decision Tree?
A decision tree is the graphical depiction of all the possibilities or outcomes to solve a specific
issue or avail a potential opportunity. It is a useful financial tool which visually facilitates the
, classification of all the probable results in a given situation.
Terminologies Used
Let us understand some of the relevant concepts and terms used in the decision tree:
Root Node: A root node compiles the whole sample, it is then divided into multiple sets
which comprise of homogeneous variables.
Decision Node: That sub-node which diverges into further possibilities, can be denoted
as a decision node.
Terminal Node: The final node showing the outcome which cannot be categorized any
further, is termed as a value or terminal node.
Branch: A branch denotes the various alternatives available with the decision tree maker.
Splitting: The division of the available option (depicted by a node or sub-node) into
multiple sub-nodes is termed as splitting.
Pruning: It is just the reverse of splitting, where the decision tree maker can eliminate
one or more sub-nodes from a particular decision node.
Steps in Decision Tree Analysis
Now, you must be wondering, how to initiate the decision tree analysis for solving a particular
issue?
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