Decision Tree

Topics: Decision theory, Decision tree, Risk Pages: 3 (1076 words) Published: December 13, 2010
Decision Tree Analysis
Choosing Between Options
by Projecting Likely Outcomes
Decision Trees are useful tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can explore options, and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action. This makes them particularly useful for choosing between different strategies, projects or investment opportunities, particularly when your resources are limited. How to Use the Tool

You start a Decision Tree with a decision that you need to make. Draw a small square to represent this on the left hand side of a large piece of paper, half way down the page. From this box draw out lines towards the right for each possible solution, and write a short description of the solution along the line. Keep the lines apart as far as possible so that you can expand your thoughts. At the end of each line, consider the results. If the result of taking that decision is uncertain, draw a small circle. If the result is another decision that you need to make, draw another square. Squares represent decisions, and circles represent uncertain outcomes. Write the decision or factor above the square or circle. If you have completed the solution at the end of the line, just leave it blank. Starting from the new decision squares on your diagram, draw out lines representing the options that you could select. From the circles draw lines representing possible outcomes. Again make a brief note on the line saying what it means. Keep on doing this until you have drawn out as many of the possible outcomes and decisions as you can see leading on from the original decisions. An example of the sort of thing you will end up with is shown in Figure 1:

Once you have done this, review your tree diagram. Challenge each square and circle to see if there are any...
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