Decision Tree


 

Decision Tree

 
 
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:
  1. Develop a new product
  2. Do nothing and stay with the old product
  3. Enhance the old product
  4. Replace the product with a 3rd party product.
The decision tree below illutstrates these choices and the estimated sales and their probability.