Decisions can be complex and uncertain. Decision trees are a tool for illustrating and anlaysing decisions and their possible consequences. The tree helps to clearly show:
Factors in a decision
Identifying and managing uncertainty and risk within a decision
Consequences of a decision
Decision trees are drawn from left to right. They expand branching out until a consequent is reached.A decison Tree consists of 3 types of nodes:
Decision nodes (represented by squares)
Chance nodes (represented by circles)
End nodes (represented by triangles)
For example say you have to make a decision about improving a product your company makes. This gives you 4 basic choices:
Develop a new product
Do nothing and stay with the old product
Enhance the old product
Replace the product with a 3rd party product.
The decision tree below illutstrates these choices and the estimated sales and their probability.
