Decision Trees

Decision Trees

1. A decision tree is a mathematical model used to help managers make decisions

2. A decision tree uses estimates and probabilities to calculate likely outcomes

3. A decision tree helps to decide whether the net gain from a decision is worthwhile

4. Expected value = The financial value of an outcome calculated by multiplying the estimated financial effect by its probability

5. Net gain = Value gained from making a decision

   • Calculated by adding together the expected value of each outcome and deducting the costs associated with the decision

6. BENEFITS

   • Choices set out in logical way
   • Likely costs and potential benefits considered
   • The "risk" of the options are the addressed

7. DRAWBACKS

   • Probabilities prone to error
   • Uses quantitative data only

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