# Decision Tree

Topics: Decision tree, Decision theory, Decision analysis Pages: 26 (7700 words) Published: March 29, 2013
Decision Trees
A Primer for Decision-making Professionals

By Rafael Olivas 2007

Decision Trees
A Primer for Decision-making Professionals

ii

Decision Trees
A Primer for Decision-making Professionals Table of Contents Section Page Preface................................................................................................................................. iv 1.0 Introduction................................................................................................................. 1 1.1 Advantages of using decision trees ....................................................................... 1 1.2 About this primer.................................................................................................. 1 1.3 To use this primer................................................................................................. 2 Decision Scenario ........................................................................................................ 3 2.1 Describe decision alternatives and outcomes......................................................... 4 2.1.1 The first decision (root node)....................................................................................................... 4 2.1.2 Chance outcomes .......................................................................................................................... 5 2.1.3 Endpoints and payoffs .................................................................................................................. 5

2.0

2.2 Incorporate uncertainty (outcome probability) ...................................................... 7 2.3 Find the expected value (EV)................................................................................ 8 2.4 Add a sequential decision ................................................................................... 10 2.4.1 Construct a decision tree ............................................................................................................ 10 2.4.2 Recalculate the expected values ................................................................................................ 11 2.4.3 Analyze the changes ................................................................................................................... 13

3.0

Basic Concepts........................................................................................................... 14 3.1 Decision tree notation (nodes and branches) ....................................................... 14 3.1.1 3.1.2 3.1.3 3.1.4 Decision nodes and the root node.............................................................................................. 15 Chance nodes .............................................................................................................................. 15 Endpoints..................................................................................................................................... 15 Branches ...................................................................................................................................... 15

3.2 3.3 3.4 3.5 4.0 5.0

Payoff values...................................................................................................... 16 Outcome probability........................................................................................... 17 Expected value ................................................................................................... 18 Decision tree analysis ......................................................................................... 20

Glossary ..................................................................................................................... 23 More to Explore ........................................................................................................ 26

iii

Decision Trees
A Primer for Decision-making Professionals

Preface
Decision...