Key Idea: HL Topic 6.6 extends decision tree analysis with more complex multi-stage scenarios, sensitivity analysis, and detailed evaluation of how decision trees integrate with other strategic planning tools.
Decision trees map options, uncertainty, probabilities and expected values. Draw left to right and calculate right to left.
🔒 Interactive diagram
Explore the labelled diagram, charts and maps for this topic in study mode.
Core structure (memorise)
- Decision trees map choices, outcomes, probabilities and financial values
- Square = decision node. Circle = chance node
- EV = outcome × probability for each outcome, then sum
- Net EV = expected value minus cost of the option
- Probabilities at each chance node must add up to 1.0
✅ Why decision trees help: Visual tool — easy to compare options. Quantitative — supports structured choice. Forces managers to consider risk and uncertainty. Useful for comparing alternative scenarios.
⚠️ Limits of decision trees: Probabilities are estimates, not facts. Ignores many qualitative factors. Can create false precision. Highest EV is not always the best strategic choice.
Technical rules examiners expect
- Draw left to right
- Calculate right to left
- Show all workings clearly
- Mark rejected options with two diagonal lines if required
- Always evaluate beyond the numbers
HL students must go beyond calculation. A good evaluation discusses how reliable the probabilities are, how much downside risk exists, and whether qualitative issues may outweigh the highest expected value.
Evaluation tip: the highest EV may still be rejected if the business is risk-averse, short of cash, worried about reputation, or facing major stakeholder resistance.
Important: Common trap: students calculate the expected value correctly but forget to subtract costs, ignore risk, or fail to explain why the chosen option is suitable for the business.
- Draw the tree accurately
- Label decision and chance nodes clearly
- Calculate expected values right to left
- Calculate net EV where needed
- Choose the strongest option using both numbers and judgement
- Add risk, stakeholder and qualitative evaluation for HL