3.3.3 Decision trees

Question 1

What are decision trees?

Answer 1

Are mathematical models that set out all the options available for managers when making a decision, plus the possible outcomes of those decisions

Question 2

Probability

Answer 2

the chance of an outcome happening

Question 3

Expected value

Answer 3

the financial value of an outcome calculated by multiplying the estimated financial effect by its profitability

Question 4

Net gain

Answer 4

the value to be gained from taking a decision. Calculated by adding together the expected value of each outcome and deducting the costs associated with the decision

Question 5

Positives of decision trees

Answer 5

• choices clearly presented and decision making method given
• probabilities highlight the risk vs the rewards of each choice and allow for uncertainty
• considers alternative outcomes as well as success

Question 6

Negatives of decision trees

Answer 6

• probabilities are just estimates and prone to error especially for new or one-off decisions
• only uses quantitative data
• assignment of expected values and probabilities can involve bias