Decision Tree Analysis

It is extremely useful to represent the structure of a decision problem under uncertainty by a ‘decision tree diagram’ also known as “decision diagram”.

A decision tree is a graphic model of decision process. With it, we can introduce probabilities into the analysis of complex decisions involving (i) many alternatives, and (ii) future conditions that are not known but can be specified in terms of a set of discrete probabilities of a continuous probability distribution. The decision tree analysis helps in making decision concerning a wide variety of problems such as project management, personnel, new product strategies, acquisition or disposal of physical properties, investments, etc.

It should be noted that a decision tree is derived from the physical appearance of the usual graphic representation of this technique. A branch is used for each alternative and sub-branches for each possible outcome or chance events that can occur from that alternative. Because each sub-branch can again, we eventually build a tree-like structure representing all possible outcomes.
Decision trees have standard symbols: squares symbolize decision points and circles represent chance events. From each square and circle branches are drawn. These represent each possible outcome or state of nature that could result.

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