Decision Trees

Understanding Decision Trees

• A Decision Tree is a graphical representation of different possible decision paths and their likely outcomes.
• It is significant in strategic decision-making as it allows for the systematic tracing of various choices and helps identify the best course of action.
• It uses a tree-like model of branching paths, each breaking down into further branches representing different outcomes or decisions.

Components of a Decision Tree

• Decision points: These are shown as squares on the decision tree. They represent points where a decision has to be made.
• Branches: Branches or lines stemming from decision points represent potential options or outcomes.
• End points: These are marked as triangles and represent the final outcome of a chain of decisions and chance events.

How to Construct a Decision Tree

• Start with a single box (or root) that serves as the initial decision point.
• Draw lines or branches out from the box to denote various options available.
• From every point where a decision is made, draw out more lines to illustrate possible outcomes.
• At the end of each branch, note down the results or outcomes.

Using Decision Trees

• Decision trees help in visualising the possible consequences of different choices and offer a comprehensive picture of the potential pathways towards a decision.
• They allow evaluation and comparison of the different options in terms of their profitability or feasibility.
• Used sensibly, they can enable a strategic choice that balances potential profits against risks.

Limitations of Decision Trees

• Decision trees simplify complex decisions and may not fully reflect real-life complexities.
• They rely on estimated probabilities and often lack precision.
• They can become quite complex with many branches, which could lead to confusion rather than clarity.

When using decision trees, bear in mind their limitations and apply them alongside other decision-making tools for a well-rounded approach.