8/6/2019 Decision Tree (Final)
1/14
8/6/2019 Decision Tree (Final)
2/14
8/6/2019 Decision Tree (Final)
3/14
Decision Tree
is a graphical representation of variousdecision alternatives and the sequence
of events as if they were branches of
tree.
What is Decision Tree?
8/6/2019 Decision Tree (Final)
4/14
A
Advantages
Simple to understand and interpret
Enables a business to quantify decision makin
Useful when the outcomes are uncertain
Allows comparison of different possibledecisions to be made
Performs well with large data in a short time
8/6/2019 Decision Tree (Final)
5/14
A
Disadvantages
Diagrams may become more complicated
Accuracy of the data
Reliability of probabilities
Data may be historical
8/6/2019 Decision Tree (Final)
6/14
COMPONENTS
1. DECISION NODE
2. CHANCE NODE
3. T
ERMINAL NOD
E
8/6/2019 Decision Tree (Final)
7/14
Decision
Node
Referred to as the root of the tree
which is placed to the left and is
represented by a small square.
Decision nodes represent points at
which the decision maker has to make
a choice of one alternative from a
number of possible alternatives
8/6/2019 Decision Tree (Final)
8/14
Chance
Node
Shows occurrence of events over which the decision maker has nocontrol.
From a chance node, several lines are drawn showing different
possible event.
8/6/2019 Decision Tree (Final)
9/14
Terminal Node
Right Side of the tree at the end of the branches.
Also referred to as a leaf as it is the final destinationwhich has no other paths leading awayfrom it.
8/6/2019 Decision Tree (Final)
10/14
How to Use the Tool
DECISION
NODE
CHANCE
NODE
BRANCH
BRANCH
CHANCENODE
8/6/2019 Decision Tree (Final)
11/14
DECISION TREE PROBLEM
Gabbar company is currently working with a process which after paying for materials,
labour etc., brings a profit ofRs.12000. The following alternatives are made available to
the company.
(i) The company can conduct research (R1) which is expected to cost Rs. 10,000 having 90%
chances of success. If it proves a success, the company will get a gross income of Rs. 25000
(ii) The company can conduct research (R2) which is expected to cost Rs. 8000 having a
probability of60% success, the gross income will be Rs. 25000.
(iii) The company can pay Rs.6,000 as royalty for the new process which will bring a gross
income of Rs. 20,000.
(iv) The company continues the current process.
Because of limited resources, it is assumed that only one of the two types of research can becarried out at a time .
Use decision tree analysis to locate the optimal strategy for the company
8/6/2019 Decision Tree (Final)
12/14
Continue Current
Process
New Process
R1
R2
Success
Success
Failure
Failure
25,000
0-10,000
-6,000
-8,000
(0.10)
(0.90)
(0.60) 25,000
0
20,000
12,000
(0.40)
22,500
15,000
14,000
SOLUTION
8/6/2019 Decision Tree (Final)
13/14
Recommendeddecision to the
company is to go forthe new process at acost of Rs.6,000.The correspondingexpected payoff isRs.14,000.
Conclusion
8/6/2019 Decision Tree (Final)
14/14