ACCA PM Syllabus C. Decision-making Techniques - Decision Trees - Notes ^{5 / 6}

A Decision Tree is a diagram that looks at alternative courses of action and their possible outcomes

There are 2 stages to using Decision Trees:

1. Draw the Decision Tree (including all probabilities and outcomes)

2. Use expected values at all outcome points to make decisions.

Drawing the Decision Tree

• Draw the tree from left to right

• A square represents a Decision

• A circle represents an Outcome

• At a Decision Square - a branch from it represents a potential event - with a probability of it happening attached

Figure 1:

There are two branches coming off the initial decision point - the top branch has a certain outcome

The lower branch has two possible outcomes, and a further 2 possible outcomes for each of these

The next step would be to label the tree and put the cash inflows/outflows and probabilities in

Evaluation of the Tree

Evaluate the tree from right to left

• Calculate an Expected Value at each Outcome circle

• Choose the best option at each Decision square

• Finally, recommend the option with the highest expected value