Decision Trees in Business Decision-Making

These flashcards cover the key concepts and terminology associated with decision trees in business decision-making.

Decision Tree

A pictorial representation of decisions and their possible consequences, including outcomes, costs, and probabilities.

Decision Nodes

Points in a decision tree where a choice must be made between different options.

Chance Nodes

Points in a decision tree where outcomes are uncertain and associated with probabilities.

Expected Value

The calculated financial value of an outcome, found by multiplying the estimated effect by its probability.

Net Gain

The profit from a decision after deducting the associated costs from the expected value of the outcomes.

Probability

The likelihood of an outcome occurring, expressed as a value between 0 (impossible) and 1 (certain).

Outcome

The result of a decision made in a decision tree, which can have associated financial gains or losses.

Benefits of Decision Trees

Includes clear visualization of choices, consideration of risks, and easy understanding of potential outcomes.

Drawbacks of Decision Trees

Includes reliance on estimates, potential bias in probability assignments, and focus only on quantitative data.

Constructing a Decision Tree

The process of laying out decisions, options, costs, and expected outcomes to analyze business scenarios.