decision tree

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Decision tree

Schematic way of representing alternative sequential decisions and the possible outcomes from these decisions.

Decision Tree

In risk analysis, a diagram of decisions and their potential consequences. It is used to help determine the most straightforward (and cheapest) way to arrive at a stated goal. It is represented by potential decisions (drawn as squares), branching off into different proximate consequences (drawn as circles), and potential end results (drawn as triangles).
Fig.32 Decision tree. The businessman has two options: to open a new factory to boost production capacity or not to open a new factory; and he has to consider two states of nature or events which can occur economic boom or recession. The businessman must assess the likelihood of each of these events occurring and, in this case, based on his knowledge and experience, he estimates that there is a one-in-two chance of a boom and a 0.5 probability of a recession. Finally, the businessman estimates the financial consequences as an £80,000 profit for the new factory if there is a boom, and a £30,000 loss if there is a recession.

decision tree

an aid to decision-making in uncertain conditions, that sets out alternative courses of action and the financial consequences of each alternative, and assigns subjective probabilities to the likelihood of future events occurring. For, example, a firm thinking of opening a new factory the success of which will depend upon consumer spending (and thus the state of the economy) would have a decision tree like Fig. 32.

In order to make a decision, the manager needs a decision criterion to enable him to choose which he regards as the best of the alternatives and, since these choices involve an element of risk, we therefore need to know something about his attitudes to risk. If the manager were neutral in his attitude to risk then we could calculate the certainty equivalent of the ‘open factory’ alternative using the expected money value criterion, which takes the financial consequence of each outcome and weights it by the probability of its occurrence, thus:

which being greater than the £0 for certain of not opening the factory would justify going ahead with the factory project.

However, if the manager were averse to risk then he might not regard the expected money value criterion as being appropriate, for he might require a risk premium to induce him to take the risk. Application of a more cautious certainty equivalent criterion would reduce the certainty equivalent of the ‘open factory’ branch and might even tip the decision against going ahead on the grounds of the ‘downside risk’ of losing £30,000.See UNCERTAINTY AND RISK.

decision tree

a graphical representation of the decision-making process in relation to a particular economic decision. The decision tree illustrates the possibilities open to the decision-maker in choosing between alternative strategies. It is possible to specify the financial consequence of each ‘branch’ of the decision tree and to gauge the PROBABILITY of particular events occurring that might affect the consequences of the decisions made. See RISK AND UNCERTAINTY.
References in periodicals archive ?
What should be prominent in providers' minds are helping to assist and counsel those with issues such as grief and bereavement, reconciling them to their decisions, and helping residents and families move toward the final transitions of life.
People with disabilities are being encouraged to take an active role in the decision making process.
In the summer of 2005, a survey asking about respondents' perceptions of various aspects of decision making in their school district was administered to all members of the Literacy Committee during a regularly scheduled meeting.
Three specific application areas are germane to the process of readying students for for transition from high school to work: (a) functional career decision making; (b) person centered planning within the construct of career/vocational education ; and (c) transitional programming.
In essence, delaying a decision to have more certainty about either good or bad events in the future has value for two reasons: 1) to capture the benefits of completing the investment if they are higher than expected, and 2) maintaining the flexibility to avoid a mistake if the benefits are not as high as expected.
We saw it as investing so that managers, account reps, finance and other executives--people from top to bottom--could get better decision support, key information and analysis in a more timely way.
Law enforcement personnel need experience making decisions in situations in which other people, whether suspects, bystanders, or team members, are primary features.
Coincidentally, days after Yale announced its decision, the school also reported that it had received a record number of Early Decision applications this year.
ACPE Small Practice Forum leader Trey Washburn, MD, says anyone charged with making decisions should read this book at least once a year.
Considering the complexity of career decisions, on one hand, and individuals' limited cognitive information processing capability and limited time and material resources, on the other hand, the challenge faced by any prescriptive career decision-making model is to reduce the amount of information that must be processed, with as little loss as possible in the quality of the decision made (i.
Incorporate ACA's "World of Good" message into your discussion, reassuring parents that the camp experience has significant value and should not be put off simply because this important decision may seem temporarily overwhelming.
Crainer, regrettably, does not get into the anatomy of "great decision making," perhaps because his case histories are so eclectic and cover such a time span.

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