Summary
Summary Decision Trees
- Course
- Institution
Describes what a decision tree is, uses an example to show how to interpret one, and explains the advantages and disadvantages of decision trees.
[Show more]Preview 1 out of 1 pages
Preview 1 out of 1 pages
Add to cart
Getting your document ready...
Add to cart
Seller
Follow
emily1744
Reviews received
Content preview
Theme 3 Topic 8Decision Trees
Decision Trees
Diagrams which set out all the options available when making a decision, plus an estimate of their
likelihood of occurring.
Sets out a logical process for making a decision.
Explores the various options and tries to determine the likelihood of success/failure of each option.
Example of a Decision Tree
High Demand £16m
Cost of Product A 0.7 Chance of that
decision (£2m) outcome occurring
Decision Low Demand
business must £6m
0.3
make
High Demand
£12m
Product B 0.6
Expected monetary
(£2m)
value of the decision.
Low Demand £4m
Expected Value = Probability of Each Outcome x Revenue Revenue
0.4 (these are then added together for each option)
Net Expected Value (Net Gain) = Expected Value – Cost of decision
Do Nothing
Product A: £0 B:
Product
Possible outcome
High demand: £16m x 0.7 = £11.2m High demand: £12m x 0.6 = £7.2m
Low demand: £6m x 0.3 = £1.8m Low demand: £4m x 0.4 = £1.6m
Total expected value: £11.2m + £1.8m = £13m Total expected value: £7.2m + £1.6m = £8.8m
Net gain: £13m - £7m = £6m Net gain: £8.8m - £2m = £6.8m
Project B has the highest expected monetary value
Project B has a lower initial cost
However, Project B has a lower chance of high demand than Project A so it may be riskier.
Both options are more profitable than launching no additional products.
Advantages Disadvantages
The technique allows for certainty. Gathering the data required is hard and is likely to
involve guess work.
Decision trees force managers to consider all New problems mean previous occurrences can’t be
possible options. used to base estimated probabilities and outcomes
on, reducing the reliability of the decision tree.
Problems are set out clearly, encouraging a logical An element of bias can be introduced by whoever is
approach. estimating probabilities and outcomes if they wish
to influence the outcome of the decision.
Qualification of problems is encouraged by the Decision trees can lead to a failure to consider
drawing of the tree and subsequent calculations. qualitative aspects of decisions.
The benefits of buying summaries with Stuvia:
Created by fellow students, verified by reviews
Quality you can trust: written by students who passed their tests and reviewed by others who've used these notes.
Didn't get what you expected? Choose another document
No worries! You can instantly pick a different document that better fits what you're looking for.
Pay as you like, start learning right away
No subscription, no commitments. Pay the way you're used to via credit card and download your PDF document instantly.
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller emily1744. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $4.21. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
53207 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 15 years now