Decision Trees Flashcards
(12 cards)
What does a square represent in a decision tree?
A square represents that a decision has to be made.
What do the lines coming from a square represent?
The lines coming from the square represent the possible choices.
What do the circles in a decision tree show?
The circles show that there are outcomes as a result of a choice.
What do the lines coming from a circle indicate?
The lines coming from a circle show the expected outcomes.
What does probability indicate in a decision tree?
The probability shows the estimated likelihood of a given outcome.
What must the probability of all outcomes add up to?
The probability of all outcomes must add up to 1.
What is Expected Value (EV)?
The Expected Value (EV) shows the weighted average of a given choice.
How do you calculate Expected Value?
To calculate EV, multiply the probability of each outcome by its expected value and add them together.
Example: EV Launch new product = [0.4 × 30) + [0.6 x -8] = 12 - 4.8 = £7.2m.
What does the Expected Value represent?
The Expected Value is the average outcome if this decision was made many times.
What is Net Gain?
The Net Gain is the Expected Value minus the initial cost of a given choice.
What is the Net Gain of launching a new product?
Net Gain of launching new product = £7.2m - £5m = £2.2m.
How can Net Gain be compared?
Net Gain can be compared with the Net Gain of other choices.
