DECISION TREE

PRESENTED BY GROUP 2
 Intoduction

Use of Decision

TABLE OF Trees

Steps in Decision

CONTENT Trees

S
Pros & Cons

Conclusion
 INTRODUCTION TO
DECISION TREE
What is a Decision Tree?
A decision tree is a visual tool used in decision-making
that lays out options, potential outcomes, and
probabilities in a tree-like structure.
•It starts with a decision node representing a choice
to be made.
•Branches represent possible actions or paths.
•End nodes display the outcomes or consequences of
those actions.

Key Components:
• Decision Node (Square): Represents choices or
actions.
• Chance Node (Circle): Represents uncertain
outcomes or probabilities.
• Branches: Show possible actions or results.
• End Node (Triangle): Represents final outcomes.
 Why Use a Decision Tree in
Management?
1. Clarity in Complex Decisions
Decision trees simplify complicated choices by
breaking them into smaller steps:
• Think of it as a map. Instead of looking at the
entire journey all at once, you follow it step by
step.
• Managers can see every possible choice and the
outcomes, making the decision-making process
less overwhelming.
•Example:
If a company must decide whether to expand its
product line, a decision tree shows the possible paths
(expand or not) and the outcomes (increased sales,
higher costs, or risks).
 Why Use a Decision Tree in
Management?
2. Data-Driven Decision Making
Decision trees rely on evidence, not just instincts:
• Managers assign probabilities to outcomes and
calculate potential costs and benefits. This
ensures decisions are backed by logic and data.
• It reduces the chance of making emotional or
biased choices.
•Example:
Instead of guessing which product customers prefer, a
manager uses customer surveys and sales data to
predict demand. These insights are added to the
decision tree.
 Why Use a Decision Tree in
Management?
3. Scenario Analysis
Decision trees help explore "what if" scenarios before
making a choice:
• Managers can imagine different situations and
see how the outcomes change. This helps them
prepare for risks and uncertainties.
• It’s like testing multiple plans before picking the
best one.
•Example:
A decision tree can show what happens if a competitor
launches a similar product—will it impact sales, and by
how much?
 Why Use a Decision Tree in
Management?
4. Collaboration Tool
Decision trees make it easier for teams to work
together and agree on a solution:
• By visualizing options and outcomes, everyone in
a team can understand the logic behind
decisions.
• It resolves conflicts by showing clear evidence
instead of relying on opinions.
•Example:
A marketing team and a finance team may disagree on
whether to increase advertising spend. A decision tree
shows potential returns, making it easier to reach a
common ground.
 STEPS TO BUILD A
DECISION TREE
Step 1: Identify the Decision to Be Made
• Start by clearly defining the problem or question you need to answer.
• Think about the main decision you have to make, such as “Should we launch a new
product?” or “Which supplier should we choose?”
• Example:
A business wants to decide whether to expand to a new market or improve its current product.
Step 2: List All Possible Options or Actions
• Write down all the choices available to you.
• These choices form the branches of your decision tree.
• Example:
The options might include:
• Expand into Market A.
• Expand into Market B.
• Stay in the current market and invest in product improvements.
 STEPS TO BUILD A
DECISION TREE
Step 3: Identify Potential Outcomes and Their Probabilities
• For each choice, think about what could happen next (good or bad).
• Estimate the likelihood (probability) of each outcome.
• Example:
• If you expand to Market A, you might:
• Achieve high sales (60% chance).
• Break even (30% chance).
• Lose money (10% chance).
Step 4: Assign Costs and Benefits to Each Outcome
• Add numbers to your tree by estimating the costs of each choice and the benefits (profits
or savings) for each outcome.
• Example:
• High sales might bring $1 million in profit.
• Breaking even might lead to no profit or loss.
• Losing money could cost $200,000.
 STEPS TO BUILD A
DECISION
Step 5: Analyze and Select the Best Path
TREE
• Use the probabilities and costs/benefits
to calculate the expected value of each
option.
• The option with the highest expected
value is usually the best choice.
•Example:
• Expanding to Market A might offer the
highest expected profit, so that becomes
the preferred choice.
 Pros and Cons of
Decision Trees
ADVANTAGES DISADVANTAGES
1. Simplicity and Clarity: Easy to 1. Over-Simplification: May oversimplify
understand and interpret, even for non- complex problems by ignoring some variables.
experts. Visualizes complex decisions in a 2. Dependency on Accurate Data: Requires
structured format. precise probabilities and financial estimates for
2. Flexibility: Can be applied to a wide range accuracy.
of industries and problems. Supports both 3. Can Become Unwieldy: Large decision trees
qualitative and quantitative data. can become too complex to manage.
3. Supports Scenario Analysis: Explores 4. Prone to Bias: If probabilities or outcomes are
“what if” scenarios to assess risks and estimated poorly, the tree can lead to incorrect
rewards. decisions.
4. Data-Driven Decisions: Incorporates 5. Ignores External Changes: May not account
probabilities and outcomes, reducing for rapidly changing market or environmental
guesswork. factors.
5. Encourages Collaboration: Helps teams
and stakeholders align on decisions by
providing a clear framework.
 CONCLUSION

Decision trees simplify complex decisions, enabling data-driven choices

and clear visualization of options. They foster collaboration, support
scenario analysis, and help navigate uncertainty. While requiring
accurate data and careful management, their strategic benefits
empower businesses to make informed decisions and adapt effectively
in today’s competitive and dynamic environment.
THANK
YOU