Decision trees are diagrams that map out options for a decision and possible outcomes. They have four main features: options available, possible outcomes, chances of outcomes occurring, and economic returns. Decision trees are constructed from left to right, with branches representing options and nodes denoting decision points. Circles represent chance outcomes with probabilities listed. Expected value is calculated by multiplying probabilities by economic returns to determine the likely financial result. Decision trees are useful for considering all variables and risks logically, but rely on accurate data and cannot account for qualitative factors.

1. DECISION
TREES
Logical approach to decision making

2. DECISION TREE
A diagram that sets out
the options connected
with a decision and the
outcomes and economic
returns that may result

3. Four main features of a
bussiness decision
All of the
option
open to a
manager
The
different
possible
outcomes
The
chances of
these
outcomes
occurring
The
economic
return from
these
outcomes

4. Construction of decision
trees
From left to right
Each branch represents
an option
Decision points are
denoted by square
(nodes)
A circle shows that
outcomes may result from
a decision (chance node)
Probabilities are shown
alongside each of these
possible
outcomes(numerical
values)
The economic returns:the
expected financial gains or
losses

5. Expected value
 The likely financial result of an
outcome obtained by multiplying
the probability of an event
occurring by the forecast
economic return if it does occur.

6. Main advantages of
decision trees
They force the decision
marker to consider all of
the options and variables
related to a decision
An easy to
follow diagram
allows for
numerical
consideration
of risk and
economic
returns to be
included
Encourages
logical
thinking and
discussion
amongst
managers

7. Evaluation of decision
trees: limitations
The accuracy of
the data used:
Probabilities may
be based on past
data, but
circumstances
may change
Decision trees
cannot replace
the consideration
of risk or the
impact of non
numerical
qualitative factors
The expected
values are
averages returns.