DECISION TREE

Decision Trees

Some decisions involve series of steps, second

step depending on outcome of first, third
depending on outcome of second, and so on.

Often uncertainty surrounds each step; decision

trees are a model for solving such a problem.
Decision tree is a graphical method for
identifying alternative actions, estimating
probabilities & indicating the resulting expected
payoff.

Graphical form visually helps the decision maker

view his alternatives &outcomes; schematic
representation of problem that displays
information in a more understandable problem
 USES OF DECISION TREE
Used to make decisions in complex situations
particularly when outcome of later situation is
dependent on outcome of former

Makes possible for decision maker to see major

alternatives open to them

By incorporating probabilities of various events, it is

possible to comprehend true probability of a decision
leading to results desired.
Basic value of decision tree lies in expressing all
outcomes or events in quantitative terms for
precision in decision making
Computers facilitate processing large volume of
information with complex relationships, making
calculation aspect easier; leads to increased use
of decision tree
Exhibit I illustrates a decision tree for the cocktail party problem. This tree is a
different way of displaying the same information shown in the payoff table.
 LIMITATIONS OF DECISION TREE
• Complexity - relationships among various events &
alternatives cannot be established.
• Making assumptions & assigning probabilities to various
events at various levels in a decision tree. There is often
inconsistency in assigning probabilities to various events.
• Many managers are involved in this process; often it
becomes time consuming.
• Inspite of these limitations, decision tree offers much better
solution for making decision under uncertainty