Decision Tree

1067 WordsDec 4, 20105 Pages
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…show more content…
Calculating the Value of Decision Nodes When you are evaluating a decision node, write down the cost of each option along each decision line. Then subtract the cost from the outcome value that you have already calculated. This will give you a value that represents the benefit of that decision. Note that amounts already spent do not count for this analysis – these are 'sunk costs ' and (despite the emotional cost) should not be factored into the decision. When you have calculated these decision benefits, choose the option that has the largest benefit, and take that as the decision made. This is the value of that decision node. Figure 4 shows this calculation of decision nodes in our example: In this example, the benefit we previously calculated for 'new product, thorough development ' was $420,400. We estimate the future cost of this approach as $150,000. This gives a net benefit of $270,400. The net benefit of 'new product, rapid development ' was $31,400. On this branch we therefore choose the most valuable option, 'new product, thorough development ', and allocate this value to the decision node. Result By applying this technique we can see that the best option is to develop a new product. It is worth much more to us to take our time and get the product right, than to rush the product to market. And it 's better just to improve our existing products than to
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