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Decision tree
A decision tree is a decision support tool that
uses a tree like graph or model of decisions
and their possible consequences,
including chance event outcomes, resource
costs, and utility. It is one way to display
an algorithm.

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Decision Trees
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Planning Tool
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Decision Trees
Enable a business to quantify
decision making
Useful when the outcomes are
uncertain
Places a numerical value on likely
or potential outcomes
Allows comparison of different
possible decisions to be made


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Decision Trees
Limitations:
How accurate is the data used
in the construction of the tree?
How reliable are the estimates
of the probabilities?
Data may be historical does this data
relate to real time?
Necessity of factoring in the qualitative
factors human resources, motivation,
reaction, relations with suppliers and other
stakeholders

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Process
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The Process
Expand by opening new outlet
Maintain current status
Economic growth rises
Economic growth declines
0.7
0.3
Expected outcome
300,000
Expected outcome
-500,000
0
A square denotes the point where a decision is made, In this example, a business is contemplating
opening a new outlet. The uncertainty is the state of the economy if the economy continues to grow
healthily the option is estimated to yield profits of 300,000. However, if the economy fails to grow as
expected, the potential loss is estimated at 500,000.
There is also the option to do nothing and maintain the current status quo! This would have an outcome of
0.
The circle denotes the point where different outcomes could occur. The estimates of the probability and the
knowledge of the expected outcome allow the firm to make a calculation of the likely return. In this example
it is:
Economic growth rises: 0.7 x 300,000 = 210,000
Economic growth declines: 0.3 x 500,000 = -150,000
The calculation would suggest it is wise to go ahead with the decision ( a net benefit figure of +60,000)
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Advantages
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Disadvantages
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Thank you