Decision Tree

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What is a decision tree?

A decision tree is a diagram or graph that people use to determine a course of action or to show a statistical probability. It forms the outline of the homonymous woody plant, usually standing but sometimes lying on its side. Each branch of the decision tree represents a possible decision, result or reaction. The branches furthest from the tree represent the final results.

Individuals use decision trees to clarify and find an answer to a complex problem. Decision trees are frequently used to determine a course of action in finance, investment or business.

The basics of a decision tree

A decision tree is a graphical representation of a decision and of each outcome or potential outcome of making that decision. Individuals deploy decision trees in a variety of situations, ranging from something simple and personal (“Should I go out to dinner?”) To more complex industrial, scientific, or microeconomic enterprises.

By displaying a sequence of steps, decision trees give people an efficient and easy way to visualize and understand the potential options for a decision and its range of possible outcomes. The decision tree also helps people identify each potential option and weigh each course of action against the risks and rewards that each option can generate.

An organization can deploy decision trees as a kind of decision support system. The structured model allows the reader of the graph to see how and why one choice can lead to the next, the use of branches indicating mutually exclusive options. The structure allows users to solve a problem with several possible solutions and to display these solutions in a simple and easy to understand format which also shows the relationship between different events or decisions.

In the decision tree, each end result has an assigned risk or reward weight or number. If a person uses a decision tree to make a decision, they examine each end result and assess the pros and cons. The tree itself can extend as long or as short as necessary in order to reach a correct conclusion.

Key points to remember

  • A decision tree is a graphical representation of a decision and of each outcome or potential outcome of making that decision.
  • People use decision trees in a variety of situations, ranging from something personal to more complex business, financial or investment ventures.

How to make a decision tree

To make a decision tree, you must start with a specific decision that needs to be made. You can draw a small square at the far left of the eventual tree to represent the initial decision. Then you draw lines to the outside of the box; each line moves from left to right and each represents a potential option. Or you can start with a square at the top of a page or screen and draw the lines down.

At the end of each line or option, you analyze the results. If the result of an option is a new decision, draw a box at the end of this line, then draw new lines from that decision, representing the new options and labeling them accordingly. If the result of an option is not clear, draw a circle at the end of the line, which indicates a potential risk. If an option leads to a decision, leave this line blank. You continue to develop until each line reaches an end point, which means that you have covered each choice or result. Draw a triangle to indicate the end point.

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