Decision trees

Question 1

Decision trees and what it enables managers to do?

Answer 1

• is a quantitative and methodical organizational planning tool based on the mathematical concept of probability trees.
  
  • it allows managers to see possible options and the probable outcomes, thereby helping them to make more informed decisions.

Question 2

Conventions in drawing a decision tree are outlined below:

Answer 2

1. A square represents a decision node, i.e., a decision that needs to be made.
2. A circle represents a chance node (or probability node), i.e., the probable outcomes (or expected outcomes) of different decisions.
3. Probabilities of the different outcomes are shown as decimal numbers, e.g., 0.65 means a 65% chance of the outcome occurring.
4. Cross out lines (or strike out lines) indicate the options that are rejected based on quantitative reasoning and logic.

Question 3

Advantages of using decision trees: (3)

Answer 3

• offer managers a visual representation of different decisions and choices, with probable and quantifiable outcomes.
• It helps managers to consider the various financial risks involved with different decisions and choices
• The results are easy to understand, with tangible quantitative results to support decision making.

Question 4

Disadvantages of using decision trees: (3)

Answer 4

• decision trees ignore qualitative factors (non-financial information) that often affect decision making
• The probabilities are, at best, only forecasts even if based on market research data. This means the predicted outcomes are still unknown.
• For very complex decisions with numerous and interconnected options, it can be difficult to construct a decision tree diagram that is concise and succinct.