Theme 3.3.3 - Decision Trees

Question 1

Whyb do businesses need to make decisions?

Answer 1

• Adapting to change
• Resource allocation
• Risk management
• Strategic planning
• Problem solving
• Innovation and improvement

Question 2

What is a decision tree?

Answer 2

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

Question 3

What are some key features of decision trees?

Answer 3

• Decision points
• Outcomes
• Probability or chance
• Expected monetary values

Question 4

How are decision points represented in decision trees?

Answer 4

Squares

Question 5

How are different outcomes represented?

Answer 5

Represented by circles, called “nodes”

Question 6

How to calculate the expected monetary value (EMV)?

Answer 6

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

Question 7

Definition of risk-averse

Answer 7

A preference for certain, predictable outcomes over uncertain ones, even if the uncertain options offer potential higher returns

Question 8

Benefits of using decision trees

Answer 8

• Results are straightforward and easy to interpret
• Incorporating probabilities helps assess the risk associated with different choices
• Multiple options and alternatives can be evaluated simultaneously
• Decisions are structured clearly and logically
• Costs are factored in alongside potential benefits
• The quantitative approach requires deep research to be carried out
• May reveal options that haven’t previously been considered

Question 9

Limitations of using decision trees

Answer 9

• The process of assigning probabilities and expected values can be influenced by bias
• Focuses on only numerical data, neglecting qualitative factors in decision-making
• It doesn’t eliminate the inherent risks involved
• Probabilities are estimates which may be inaccurate
• The time lag between the construction of a decision tree diagram and the implementation of the decision is likely to further affect the reliability of the expected values