Lecture notes
Decision Trees
- Institution
- CCEA
A look at what is a decision tree, factors to include, diagrams to illustrate a decision tree and how to construct one. Advantages and disadvantages of a decision tree is provided.
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Decision Trees Other Factors to Include:Definition: Time scale.
Objectives.
Are scientific, quantitative decision making tools. Risk attitude.
They set out options available to a firm together with predicted Attitude of the staff.
outcomes and a probability attached to each one. Impact on environment e.g.
This is a graphical presentation of a decision making process within a expanding production leads to
business which aims to highlight the most cost-effective decision. increase carbon footprint.
Aids the decision making process. Competitors actions - how will
Attempts to quantify the likely outcome of any decision taken using they react.
numbers to give a financial return and the probability of this Political/legislative matters -
occurrence. expanding product = need
building permission.
A decision = square.
Circle = alternatives.
Probabilities - decimal
figures.
Cost - shown next.
Benefits listed on the
right hand side.
Advantages Disadvantages
Useful tool - deciding several options. Able to gauge all Information used to produce the DT - no guarantee of
the options in a clear, precise image thus reducing that results - may be due to the market research collected
chance of failure + best option chose. being inaccurate - market conditions changing or data
Visual diagram - easy to understand - ensures best analysed incorrectly.
option.
Used effectively - when logical sequence can be By the time information is gathered + decision made-
followed - Discuss OGADIR. data may be dated - changing market. Method chose -
Think logically about each option - make informed not suitable = wasted resources.
decision - best method to choose - yield maximum Created a decision tree - using it in relation to a new
returns. decision - chances of success lower + risk is higher.
Provides quantitative aspects - highlighting costs + Only focuses - quantitative aspects - ignoring important
expected returns. Encourages consideration of all costs qualitative factors e.g.
+ risks through probabilities for each option. Allows for political/legislative/environmental/time-scale. Not
a informative decision helping to aid the decision gaining the full picture - results in negative corporate
making process - visual layout + all costs clearly visible. image.
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