Decision trees 3.3.3

Question 1

What is a decision tree?

Answer 1

A quantitative method of tracing the outcomes of a decision so that the most profitable decision can be identified

Question 2

Key elements of diagram

Answer 2

• decision points
• outcomes
• probabilities
• expected monetary values

Question 3

Calculating expected monetary values

Answer 3

(expected value of success x probability) + (expected value of failure x probability)

Question 4

Advantages of decision trees

Answer 4

• may reveal options that were not previously considered
• forced to consider risks associated with choice
• requires deep research to be conducted

Question 5

Limitations of decision trees

Answer 5

• constructed using estimates which rarely take full account of external factors
• require skill and time to gather reliable data and construct tree
• qualitative elements are not considered
• time lags may make data out-of-date