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.
[Diagram: decision-tree]
✅ 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.
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