6.6.2BM25 flashcards

Constructing and calculating decision trees

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Card 1 of 256.6.2

6.6.2

Question

Net expected value formula?

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All 25 Flashcards — Constructing and calculating decision trees

Card 1definition

Question

Net expected value formula?

Answer

Net EV = Expected value − Cost of the option.

💡 Hint

EV minus cost

Card 2concept

Question

EV = Σ (outcome × probability). Net EV = EV − ___

Answer

Cost of the option.

💡 Hint

Cost

Card 3definition

Question

Expected value formula?

Answer

EV = Σ (outcome × probability) — add up all outcome×probability pairs at a chance node.

💡 Hint

Sum of (outcome × prob)

Card 4concept

Question

The highest net EV is mathematically best, BUT consider ___

Answer

Reliability of probabilities, affordability of losses, stakeholder impact, ethics, risk appetite.

💡 Hint

Reliability + loss + stakeholders + ethics

Card 5concept

Question

Draw decision trees ___ to right, calculate ___ to left

Answer

Left; right — build the diagram forward, calculate backward.

💡 Hint

Draw → , calculate ←

Card 6concept

Question

Draw left to right, calculate ___

Answer

Right to left.

💡 Hint

Right to left

Card 7example

Question

Option A costs $50k, EV = $68k. Net EV?

Answer

$68k − $50k = $18,000 net expected gain.

💡 Hint

$18,000

Card 8concept

Question

Step 1: Start with a ___ on the left

Answer

Decision node (square □) — the starting choice.

💡 Hint

Square □

Card 9example

Question

Option A: success $100k (0.6), failure $20k (0.4). EV?

Answer

EV = ($100k × 0.6) + ($20k × 0.4) = $60k + $8k = $68,000.

💡 Hint

$68,000

Card 10concept

Question

'How much can the business afford to lose?' relates to ___

Answer

Risk tolerance — if failure means bankruptcy, even high EV may be too risky.

💡 Hint

Risk tolerance

Card 11concept

Question

In 10-mark questions, use decision tree calculation PLUS ___

Answer

Qualitative evaluation — numbers alone aren't enough for top marks.

💡 Hint

Qualitative evaluation

Card 12concept

Question

Always check that probabilities at each node add to ___

Answer

1.0 — if not, there's an error.

💡 Hint

1.0

Card 13concept

Question

Compare ___ EVs to choose between options

Answer

Net EVs — accounts for the different costs of each option.

💡 Hint

Net

Card 14concept

Question

Mark rejected options with ___

Answer

Two diagonal lines across the branch — shows which option was NOT chosen.

💡 Hint

Two diagonal lines

Card 15concept

Question

Probabilities at each node must add to ___

Answer

1.0.

💡 Hint

1.0

Card 16concept

Question

Highest net EV isn't always best if it's also the ___

Answer

Riskiest — a risk-averse business may prefer lower net EV with more certainty.

💡 Hint

Riskiest

Card 17concept

Question

A risk-averse business prefers ___ EV with more ___

Answer

Lower; certainty/predictability.

💡 Hint

Lower + certain

Card 18concept

Question

EV tells you the ___ financial return of each option

Answer

Weighted average — not what you'll definitely get, but the statistical expectation.

💡 Hint

Weighted average

Card 19concept

Question

Why mark rejected branches?

Answer

Shows the examiner you understand the decision process — Nov 2024 markscheme awarded marks for this.

💡 Hint

Marks for showing rejection

Card 20concept

Question

Always evaluate beyond numbers: discuss ___, ___, qualitative

Answer

Risk and stakeholders.

💡 Hint

Risk + stakeholders

Card 21concept

Question

Calculate from the ___ side first, then move ___

Answer

Right (outcomes); left (to compare at decision node).

💡 Hint

Right → left

Card 22concept

Question

Don't just report the EV — also evaluate ___

Answer

Whether the probabilities are reliable and what qualitative factors matter.

💡 Hint

Reliability + qualitative

Card 23concept

Question

Net EV shows the expected ___ from choosing that option

Answer

Net gain (or loss) — after accounting for the cost of the investment.

💡 Hint

Net gain

Card 24concept

Question

Show working in EV calculations for ___

Answer

Method marks — even if the final number is wrong.

💡 Hint

Method marks

Card 25concept

Question

Quick: Mark rejected branches with ___

Answer

Two diagonal lines.

💡 Hint

Two lines

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Full study notes for Constructing and calculating decision trees

Topic 6.6 hub

Decision trees

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