Decision Tree Analysis

-Dr. Jay Prakash Verma

Decision Tree Analysis

Device for representing a diagrammatic
presentation
of
sequential
and
multidimensional aspects of a particular decision
problem
for
systematic
analysis
and
evaluation.
Decision problem, Alternative Course of
Action, States of Nature, and the likely
Outcomes
of
Alternatives
are
diagrammatically or graphically depicted as if
they are branches and sub branches of
horizontal tree.

Decision Tree
Nodes: - are of two types
Decision Nodes (represented by
Chance Nodes (represented by

)
)

Decision Branch:- shows Course of

action
Chance Branch:- shows States of
Nature
Respective Payoffs:- are shown
alongside the branches.

Types of Decision Tree

Decisio
n Tree
Determini
stic
(Certainty
)
Single
Stage
(One
Decision)

Multi
Stage
(Chain of
Decisions)

Probabilis
tic
(Uncertai
nty)

Single
Stage

Multi
Stage

Advantages of Decision Tree

Useful for portraying the inter-related, sequential and
multi-dimensional aspects of any major Decision problem.
Focus attention on critical elements.
Useful when Decision Maker has to make a sequence of
decisions on major Decision Problem.
Enables the Decision Maker to see various elements of his
problem.
Problems can be systematically and explicitly defined and
evaluated.
Can be applied on various fields such as New product
Introduction, Marketing Strategy, Make Vs. Buy Decisions,
Assets acquisitions, Investment Decisions, etc.

Portray Of a Decision Tree

r
B
n

ch
n
a

io
s
i
c
1 t
De
A f Ac

Decisio(C
n Node

rs
ou

(C
ou
rs

De
c is

Chan
ce
n)
io Node

ch
n
a
r
Decisi
B
e
c
n
on
Cha
1

S
of
s
e
t
Sta ture
na

St S2
a
na t e s
tu of
re

Q1

A3

Node

Chan
ce
Node

Q2
Q3

Q4
A

eo 2
ion f Act
Br ion)
a

nc
h

Chan
ce
Node

Q5
S3
of
States
nature

S
Stat 4
es
natu of
re

Q6