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What Is a Decision Tree?

What Is a Decision Tree

They are also flowchart graphs, or diagrams that examine all of the possible options for making a decision and the possible results.

  • Decision trees are a method to assist businesses in estimating the potential outcomes in order to make informed and well-thought-out decisions.
  • Use decision trees in conjunction with other decision-making techniques to identify possibilities of outcomes.
  • The process of creating a decision tree can be an easy process, in contrast to other techniques for making decisions.
  • This post is intended for business leaders who need assistance making difficult decision-making in a timely fashion.– In the world of business, many business decisions are made that shouldn’t be made lightly. In these situations it’s crucial for business leaders to consider every option carefully. One instrument for business decision making is the decision tree.

In the words of OmniSci the definition of the concept of a decision tree “is an image representation of the various options that can be used to solve any problem so that you can determine the most efficient course for action.”

Every “branch” in the tree is a representation of the possibilities for a decision’s outcome. The branches may be extended if one outcome results in a new option to consider. The branches are incorporated into the costs that go with each option and the probability of its happening.

OmniSci offers a variety of benefits from this method: Decision trees are simple to comprehend and understand and can be utilized in conjunction with other decision-making strategies and aid businesses in being able to prepare for the various outcomes during the process of making decisions.

Because many calculations are required when creating decision trees, a lot of businesses employ specialized decision tree software to assist them with the process. Decision tree software can help businesses create their own tree as well as assign probabilities and values to each branch, and then analyze each choice. Decision tree software – paid and free can be found from a variety of vendors such as IBM, TreeAge, SmartDraw, Palisade, Angoss and Edraw.

Making an oblique decision tree

On the Mind Tools website says that decision trees are beneficial because they aid business leaders to form an accurate image of the rewards and risks that come with each possible option.

When creating a decision tree begin with a square-shaped box that represents the choice you have to make – whether in the upper or lower side of the page. Draw every option in that box, either downwards when starting from an upper point, or to the left if you start from the left-hand side. Each line should you must write the choice.

Based on Mind Tools, decision-making leaders must take into account the outcomes after each row. If an outcome from an option is not clear then draw an arc. If the outcome means that you have to make a different decision then draw a small square.

“Starting with the new decision squares in the diagram you have drawn, sketch lines of the possibilities you can choose from,” Mind Tools advises. “From those circles, trace lines that represent possibilities of outcomes.”

Continue to do this until you’ve come up with as many different results and options as you think you can get from your original decision.

After drawing the tree, study it to figure out the significance of each branch and its outcome is. You can assign values to possibilities of outcomes and calculate the likelihood of each outcome. Based on these numbers, you will be able to determine which one is the best option.

The advantages of using the decision tree

Utilizing a decision tree to investigate various possible results can have many advantages:

  • It’s simple to comprehend and comprehend the data. A decision tree’s structure makes it simple to read for anyone even for those who might not have a solid understanding of the field of statistical analysis.
  • It’s easy to make. As long as you have the data available making the decision tree is an easy procedure when compared with other techniques for making decisions.
  • It needs less clean-up of the data. According to the Corporate Finance Institute as a result of the fact that it requires less data cleaning after creating the variables of your decision tree “cases with outliers and missing values are less significant to the data of the decision tree.”

Businesses can use examples of decision trees

Decision trees assist businesses in working through a variety of options to decide the best outcome for their businesses. As per CFO selections companies make use of decision trees to outline all the possible outcomes and solutions that can assist them to make educated decisions about things like these:

  • Reducing size or expanding
  • Planning for Succession
  • The changing pricing models or new offerings of products
  • The expansion of research and development
  • Choosing whether to sell the business
  • Relocating
  • Outsourcing

Examples of Decision Trees

To gain a better understanding of how decision trees function to better understand how decision trees work, it’s best to take a look at some of the examples. One example that provides its students is a company trying to decide whether to invest in an online employee training program.

The first box is where the most important choice to be made which is whether or not to invest money for the education program designed for the new employees. In that box, two choices can be viewed as “yes” as well as “no,” so one branch is drawn from the initial box, with the option of a “yes” and the other with”no. “no.” Since the final outcome of the two options is not known the circles appear at the conclusion on each branch.

On”yes” branch to “yes” branch there are two choices for training programs that differ: “System 1” and “System 2.” From the circle at the bottom on the “yes” branch two branches are drawn out, the one specifically for System 1 and another that is for System 2. Then branches are drawn to determine how the system is to be paid for, either in full in advance or in monthly installments.

In one side, the “no” part of the tree branches are drawn to symbolize the current methods of training or employing experts for live training. Because the current plan is in place, no further branches are drawn apart from the branch. In the “hiring live trainers ‘ branch” two branches are drawn out to symbolize “field techs” as well as “sales engineers.”

When the tree is completed the costs of each branch and probabilities are analyzed to calculate and analyze each option.

To illustrate further how decision trees function You can look up these additional examples online:

Templates for a decision tree

Businesses who want to work through the decision tree process by themselves with no assistance from special software download these templates for free on the internet:

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