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Question
What is a decision tree?
Answer
A diagram mapping choices, outcomes, probabilities and financial values — helps decide based on expected value, not gut feeling.
💡 Hint
Choice diagram + probabilities
Question
Two benefits of decision trees?
Answer
Visual (easy to see all options); quantitative (uses numbers); forces risk assessment; compares expected values.
💡 Hint
Visual + quantitative + risk
Question
Read a decision tree: start from the ___ at the □
Answer
Left — follow branches to see options, then outcomes at chance nodes.
💡 Hint
Left
Question
Decision trees: □ = decision, ○ = chance, branches = ___
Answer
Options and outcomes with probabilities and financial values.
💡 Hint
Options + outcomes
Question
Compare expected values — the highest is usually the best, BUT ___
Answer
Always consider qualitative factors and risk tolerance too.
💡 Hint
Qual + risk tolerance
Question
Two limitations of decision trees?
Answer
Probabilities are estimates (may be wrong); ignores qualitative factors; complex; gives false precision.
💡 Hint
Estimates + no qual + complex
Question
Square □ on a decision tree = ___
Answer
Decision node — a point where the manager makes a choice.
💡 Hint
Decision point
Question
EV = outcome × probability (sum all at each node)
Answer
Expected value calculation — multiply and add.
💡 Hint
Multiply + add
Question
When evaluating, don't just pick the highest EV — also discuss ___
Answer
Risk, stakeholders and non-financial factors.
💡 Hint
Risk + stakeholders + non-financial
Question
Benefits: visual, quantitative, forces ___
Answer
Risk assessment — managers must think about probabilities.
💡 Hint
Risk assessment
Question
Decision trees give a 'false sense of precision' because ___
Answer
The calculations look exact but are based on estimated probabilities — garbage in, garbage out.
💡 Hint
Estimates look precise
Question
Circle ○ on a decision tree = ___
Answer
Chance node — a point where different outcomes can happen with probabilities.
💡 Hint
Chance/outcome point
Question
Decision trees don't consider ___
Answer
Qualitative factors — ethics, reputation, morale, stakeholder impact.
💡 Hint
Qualitative factors
Question
At chance nodes, look at ___ and ___
Answer
Probabilities and payoffs — to calculate expected values.
💡 Hint
Probabilities + payoffs
Question
Limitations: estimates, ignores ___, false precision
Answer
Qualitative factors (ethics, reputation, morale).
💡 Hint
Qualitative
Question
Probabilities at each chance node must add up to ___
Answer
1 (or 100%) — if they don't, something is wrong.
💡 Hint
1.0
Question
Quick: □ = ___. ○ = ___
Answer
Decision node; Chance node.
💡 Hint
Decision; Chance
Question
A risk-averse business may prefer ___ EV with more ___
Answer
Lower; certainty — safer option even if mathematically inferior.
💡 Hint
Lower EV + more certainty
Question
Expected value = outcome × ___
Answer
Probability — for each outcome, then sum all results at that node.
💡 Hint
Probability
Question
Probabilities are ___, so EVs are only as good as ___
Answer
Estimates; the estimates used — they may be wrong.
💡 Hint
Estimates; estimate quality
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Decision trees
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