MGT202

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Decision Tree
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Learning Objectives

LO1 Define decision tree and its purpose

LO2 Discuss the advantages and disadvantages of using decision tree

LO3 Identify the steps in preparing decision tree

LO4 Identify two decision tree nodes

LO5 Prepare decision tree

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Decision Tree

A graphic representation of the decision points,

the alternative courses of action available to the
decision maker, and the possible outcomes
from each alternative, as well as the relative
probabilities and the expected value of each
event.
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Advantages

1. Decision trees facilitate the evaluation of

alternatives by giving the decision maker a
visual presentation of the expected results of
each alternative.

2. Decision trees are useful when sequential

decisions are involved.
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Disadvantages

1. It may be difficult to determine all the

possible events, outcomes and their
probabilities

2. A case involving so many events and

sequential decisions may result into a more
complex decision tree which may not be that
easy to use.
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Steps in Decision Tree Preparation
Step 1: Identify the decision points and the chance
points.

Step 2: Determine the events that may result from the

chance points.

Step 3: estimate the outcomes (payoffs) of each event,

as well as their estimated probabilities.

Step 4: Compute the expected values of the outcomes.

Step 5: Evaluate the results and choose the best course

of action.
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Decision Tree Nodes

The points at which

the decision maker
must choose some
action.

The points at which

some event related
to the previous
decision will occur.
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Illustration
A wine maker must decide whether to harvest grapes now or in four
weeks. Harvesting now will yield 100,000 bottles of wine netting P2
per bottle. If the wine maker waits and the weather turns cold
(probability 0.2), the yield will be cut in half but net P3 per bottle. If
the weather does not turn cold, the yield will depend on rain. With
rain (probability 0.5), a full yield netting P4 per bottle will result.
Without rain (probability 0.5), there will still be a full 100,000-bottle
yield, but the net will be only P3 per bottle.
The optimal expected value using a decision tree
A. P200,000 C. P350,000
B. P310,000 D. P400,000
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Illustration
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Practice

A beverage stand can sell either soft drinks or coffee on any given day.
If the stand sells soft drinks and the weather is hot, it will make P2,500;
if the weather is cold, the profit will be P1,000. If the stand sells coffee
and the weather is hot, it will make P1,900; if the weather is cold, the
profit will be P2,000. The probability of cold weather on a given day at
this time is 60%.

The expected payoff for either selling coffee or soft drinks, the expected
value and the expected payoff if the vendor has perfect information are
  A. B. C. D.
Coffee P1,360 P1,960 P2,200 P3,900
Soft drinks P1,600 P1,600 P1,900 P1,900
Perfect Information. P3,000 P2,200 P1,360 P1,960
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Thank You!

1 Peter 5:10 

“And after you have suffered a little while, the God

of all grace, who has called you to his eternal
glory in Christ, will himself restore, confirm,
strengthen, and establish you.”