What role does a decision tree play in business decision making?
illustrate the choice between two investment projects with help of a decision tree assuming hypothetical condition about the states of nature, probability distibution and corresponding pay off.
Decision in bussiness shouldn't be made without charting a "Decision Tree" (also known as Classification Tree), whose aim is to illustrate the results of various kinds of decisions.
Charting the Decision Tree is proper when the bussiness process is involving a succession of decisions, where the next decision is based on the former one, more precisely, the result of the former one.
The decision tree is showing very clear which are the hazards , also the benefits resulted after making a peculiar decision.
As example of usefulness of such a decision tree is in making a choice between developping a new line of batteries or maintaining the old ones.
Each time when starting a chart decision tree type, we'll start with a square placed on the left side of the paper, almost at the edge. From this square we'll draw lines, so many as how many possibilities are in discussion, lines having a radial disposing. Above each line the solution proposed will be written, as detailed as can be. At the end of each line will be displayed the result of the solution. If the result has a degree of uncertainty, the result will be shown i a small circle.
The legend of the diagram:
square- decision needed to be made
Always the results are also called "state of nature" because, due to a lot of environment variables, the result is unpredictible, most of the time.
After charting the decision tree, the decision which worth for the bussiness process can be calculated. Values can be assigned to the possible results.
In a decision tree, the use of objectives variables it's a must. The character of the objectives variables is to be agreed at general level. Object life, Production Volume, Profit/product, all of these can represent objectives variables. The variable has to be chosen if it is possible to be maximized or minimized.
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A decision tree can serve as a graphic organizing device where individuals are able to see the broad implications of a decision or action being taken. Like all graphic organizers, the decision tree can display how decisions are undertaken, or how they will impact other elements, or what consequences will result from the decision. Decision making trees can also help in articulating a goal and the steps needed to achieve it. Decision making trees allow for clarity in vision in that others can envision what has to be done or what can be gained from undertaking a particular course of action. It is here where decision trees might be the most effective in business, as no decision can be taken unilaterally. If partnership and collaboration is critical, a decision tree can allow many to see where actions lead and how they should progress.