Page 290 - DCOM303_DMGT504_OPERATION_RESEARCH

Unit 14: Decision-making

has considered all possibilities and to assess the likelihood of each different possibility and to Notes
assess the result of each possibility in terms of cost and profit.

Notes A decision tree consists of following components:
1. Nodes such as decision nodes, chance nodes and end nodes

2. Branches such as decision branch and chance branch
3. Probability estimates
4. Payoffs
An illustration of decision tree can be seen in Figure 14.1 which shows a simple decision tree for
investment analysis. In the example 100,000 monetary units are to be invested and the decision
is to invest either in private or public shares. The values, of course are hypothetical because the
diagram represents risk and not actual returns.

Figure 14.1

You start a Decision Tree with a decision that you need to make. Draw a small square to
represent this towards the left of a large piece of paper.
From this box draw out lines towards the right for each possible solution, and write that solution
along the line. Keep the lines apart as far as possible so that you can expand your thoughts.
At the end of each line, consider the results. If the result of taking that decision is uncertain, draw
a small circle. If the result is another decision that you need to make, draw another square.
Squares represent decisions, and circles represent uncertain outcomes. Write the decision or
factor above the square or circle. If you have completed the solution at the end of the line, just
leave it blank.
Starting from the new decision squares on your diagram, draw out lines representing the options
that you could select. From the circles draw lines representing possible outcomes. Again make
a brief note on the line saying what it means. Keep on doing this until you have drawn out as
many of the possible outcomes and decisions as you can see leading on from the original
decisions.

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