Decision Tree Techniques

Decisions trees provide a method of accessing several different courses of action. These techniques help you understand the possibilities and possible pros and cons of different decisions. Decisions trees can be used for both personal and business decisions and are popular in the health care industry.
  1. Making the Tree

    • Write the decisions you need to make on a piece of paper. Draw a box around this decision. Draw lines to possible solutions to the left of the decision. Draw a square at the end of the decision and draw new lines with further decisions. If you do not know the outcome of a decision, draw a circle instead. Complete all possible decision paths.

    Evaluate the Decision

    • Assign a score to each possible outcome. Try making all the possibilities of the outcomes add up to 100 so you will have a reasonable percentage. For example, if you have nine possible outcomes, you may have eight outcomes worth 10 points and one outcome worth 20 points. The 20-point outcome would be twice as positive as each 10-point outcome, but only 20 percent as likely an outcome compared to all other possible outcomes.

      Add a probability to each decision for the uncertainty. Then multiply this probability by the points score. If you gave your 20 point outcome a probability of .2 then the score would be 4.

    Other Considerations

    • Within the business of finance decisions, you must take cost into account for each decision and decision node. For personal decisions, you must take more abstract things into account such as personal happiness and uncertainty. Because of this, decision trees tend to work better for concrete business decisions.

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