BSA CORE 1

MANAGERIAL ECONOMICS

MODULE 14
Wednesday

DECISION TREE

 Decision trees are major components of finance, philosophy, and decision

analysis in university classes.
o Yet, many students and graduates fail to understand their purpose, even
though these statistical representations play an integral role in corporate
finance and economic forecasting.
Decision Tree Basics
 Decision trees are organized as follows:
o An individual makes a big decision, such as undertaking a capital project
or choosing between two competing ventures.
o These decisions, which are often depicted with decision nodes, are based
on the expected outcomes of undertaking particular courses of action.
o An example of such an outcome would be something like, "earnings are
expected to increase by $5 million.”
o But since the events indicated by end nodes are speculative in nature,
chance nodes also specify the probability of a specific projection coming
to fruition.

 A decision tree is a diagram that determines the potential results of a series of

choices and clearly lays them out.
o By using a decision tree, project managers can easily compare different
courses of action.
o For each course, decision tree analysis evaluates the chance of success
as well as the risks, and predicts the benefits.

 To present its conclusions in the clearest possible manner, a decision tree

contains 4 key elements:
o Decision nodes - each decision node signifies that there is a choice to
make
o Branches - signify potential choices and connect all the nodes together
o Chance nodes - nodes represent non guaranteed outcomes
o End nodes - found at the end of the tree, end nodes show a final outcome

Source: https://www.sesamehr.com
Steps in decision tree analysis
Step 1. Lay out all your options
 The first thing to do is to identity all the options you have to complete your
project.
 Indeed, there are always several ways to get the result you need, but some of
them are quicker and more effective than others.
 The decision tree will help you recognize the best course of action, but first you
need to make sure that you have included all the existing options.
Step 2. Predict potential outcomes
 Now that you’ve got all your options laid out, you need to evaluate the results that
each option will bring.
 Projecting yourself in the future is never easy and your projections most probably
won’t be totally accurate.
 Nevertheless, it is important to give it your best effort so that the conclusions of
your decision tree analysis are as reliable as possible.
Step 3. Analyze the results
 By now, your decision tree contains all the branches representing your different
options with the outcomes you predicted.
 Analyze each one of the results presented in the decision tree.
 By taking into account the limitations and objectives of your project, determine
how acceptable the different outcomes are.
Step 4. Optimize your decisions
 Finally, you should optimize your decisions.
 This means determining which option will best fit your project.
 The decision tree you have created should by now present all the possible
choices and their outcomes in a clear and visual way.
 Use it to decide which option has the biggest probability of success and the
greatest benefits.
 Once you have identified the best course of actions, you can use Sesame’s task
planning software to assign task to your team members.

Source: https://www.sesamehr.com
Source: https://www.sesamehr.com