🌳 What are decision trees?
Big Idea: A decision tree is a diagram that maps out different choices and their possible outcomes, including probabilities and financial values. It helps managers make decisions based on expected value rather than gut feeling! 🎲
Key parts of a decision tree
- Decision node (square □) — a point where the manager makes a choice
- Chance node (circle ○) — a point where different outcomes can happen
- Branches — lines showing different options or outcomes
- Probabilities — the likelihood of each outcome (must add up to 1)
- Expected values — the financial return of each outcome × its probability
Square = decision node, circle = chance node — choose the option with the highest expected value
Interactive diagram
Explore the labelled diagram, charts and maps for this topic in full study mode.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it free for 7 days:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
Start your 7-day free trial Full access to Aimnova Pro · cancel anytime
✅❌ Benefits and limitations
- ✅ Visual — easy to see all options and outcomes at once
- ✅ Quantitative — uses numbers to compare options objectively
- ✅ Forces managers to consider probabilities and risks
- ✅ Can compare expected values of different choices
- ❌ Probabilities are estimates — they may be wrong
- ❌ Doesn't consider qualitative factors (ethics, reputation, morale)
- ❌ Can be complex for decisions with many options
- ❌ Gives a false sense of precision
Memorize terms 3x faster
Smart flashcards show you cards right before you forget them. Perfect for definitions and key concepts.
Try Flashcards Free7-day free trial • No card required
👀 Reading a decision tree
- Start from the LEFT at the decision node (□)
- Follow each branch to see the options
- At chance nodes (○), look at the probabilities and payoffs
- Calculate expected value for each option
- Compare expected values — the highest is usually the best choice
- But always consider qualitative factors too!
Exam tip: When evaluating a decision tree, don't just pick the highest EV — also discuss risk, stakeholders and non-financial factors.