Flashcards
What are decision trees?
Cards in this deck (5)
- 1Decision trees show which course of action is best for the business.What are decision trees?
- 2What are the features of decision trees?A square represents a decision point.
The lines coming from the square show possible courses of action.
A circle shows alternative outcomes
The decimals on the lines show the probability of each outcome occurring
The value in £s represent the payoff. - 3So how do managers use decision trees?The identify courses of action
Outline possible outcomes of each course and assign probabilities to them
Calculate the expected value (EV)
Compare both net gains to show which decision is better - 4What are the advantages and disadvantages of decision trees?They make managers work out and think about probability
But
Probabilities are hard to predict. In reality there is a wider range of outcomes.
It does not specify long or short term success. - 5What is the EV or expected value?The EV of an outcome is the probability of the outcome occurring, multiplied by the pay off the business can expect to get.
You add the EVs of the different outcomes together.
Net gain is the financial gain after initial costs have been subtracted.
Net gain =EV -initial costs
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- Flashcards on What are decision trees?, created by kkbaker15 on 10/05/2016.
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- kkbaker15
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