DECISION TREE

ANALYSIS
Presented by
Shrutika Bhosale 10
Jinika Jain 39
Ankita Hate 34
Pallavi Pawar 81
Satish Dahatonde 17
Vaibhav Deshmane 18
Sagar Jadhav 37
Introduction to decision theory
 Decision making is an integral part of management
planning, organizing, controlling and motivation
processes. The decision maker selects one strategy
(course of action) over others depending on some
criteria, like utility, sales, cost or rate of return
 Is used whenever an organization or an individual
faces a problem of decision making or dissatisfied
with the existing decisions or when alternative
selection is specified.
Decision Tree Definition
A decision tree is a graphical representation of possible
solutions to a decision based on certain conditions. It's
called a decision tree because it starts with a single box
(or root), which then branches off into a number of
solutions, just like a tree.
Decision trees are helpful, not only because they are
graphics that help you 'see' what you are thinking, but
also because making a decision tree requires a
systematic, documented thought process. Often, the
biggest limitation of our decision making is that we can
only select from the known alternatives. Decision trees
help formalize the brainstorming process so we can
identify more potential solutions.
A decision tree consists of 3 types of nodes:
1) Decision Nodes- commonly represented by
squares.
2) Chances nodes- represented by circles
3) End nodes- represented by traingles
A decision tree has only burst nodes (splitting
paths) but no sink nodes (converging paths).
Types of Decisions
 Strategic Decision:-
concerned with external environment of the
organization.

 Administrative Decision:-
concerned with structuring and acquisition of the
organization’s resources so as to optimize the
performance of the organization

 Operating Decision:-
concerned with day to day operations of the
organization such as pricing, production scheduling
, inventory levels etc.
Elements related to all decisions
 Goals to be achieved:- Objectives which the decision
maker wants to achieve by his actions

 The decision maker :- Refers to an individual or an

organization.

 Courses of action:- Also called “action” or “decision

alternatives”. They are under the control of decision
maker

 States of nature:- Exhaustive list of possible future

events. decision maker has no direct control over the
occurrence of particular event.
Elements related to all decisions
 The preference or value system:-criteria that the
decision maker uses in making a choice of the best
course of action.

 Pay off:- effectiveness associated with specified

combination of course of action and state of nature.
Also known as profits or conditional values.

 Opportunity loss table:-incurred due to failure of

not adopting most favorable course of action or
strategy. Found separately for each state of nature.
Decision Tree Example
Applied in real life, decision trees can be very complex
and end up including pages of options. But, regardless of
the complexity, decision trees are all based on the same
principles. Here is a basic example of a decision tree:
You are making your weekend plans and find out that your
parents might come to town. You'd like to have plans in
place, but there are a few unknown factors that will
determine what you can, and can't, do. Time for a decision
tree.
First, you draw your decision box. This is the box that
includes the event that starts your decision tree. In this
case it is your parents coming to town. Out of that box,
you have a branch for each possible outcome. In our
example,
Steps in decision tree analysis
Define the Problem

Explore the alternatives

Estimate expected NPV of each alternative

Assign probability of each alternative

Calculate joint probability of each alternative

Evaluate all the alternatives

Form the tree for the entire life of the project year-
wise

Choose the best option

ADVANTAGES AND DISADVANTAGES OF
DECISION TREE
Advantages :
 Decision trees are simple to understand and
interpret. People are able to understand decision
tree models after a brief explanation.
 Have value even with little hard data. Important
insights can be generated based on experts
describing a situation(its alternatives, probabilities
and costs) and their preferences for outcomes.
 Help determine worst, best and expected values
for different scenarios.
 Can be combined with other decision.
Disadvantages :
 They are unstable meaning that a small change in
the data can lead to a large change in the structure
of the optimal decision tree
 They are often relatively inaccurate. Many other
predictors perform better with similar data.
 For data including categorical variables with
different number levels, information gain in
decision trees is biased in favor of those attributes
with more levels.
 Calculations can get very complex, particularly if
many values are uncertain.
 Decision Tree Analysis
The following point should be taken into
consideration while drawing a Decision tree
1. The decision tree is made up of Squares,
circles and branches and moves from left
to right
2. Square = Decision node ; branches
coming from squares represents acts
3. Circles = Chance Events of state of
nature; branches coming from circles
represents states of nature
 State of Alternative
the W X Y Z
Economy
1000 500 0 -4000
Fair 3000 4500 5000 6000
Good 6000 6800 8000 8500
Great

The possible States of the economy and the associated probability distribution are
as follows

State: Fair Good Great

Probability: 0.2 0.5 0.3

Which alternative investment proposal would you recommend if the expected

monetary value criterion is to be employed?
 200
W 3500 1500
1800
100
X 4390 2250
2040
0
Y 4900 2500
2400
-800
Z 4750 3000
2550
 Items For Export For domestic
market market
Probability of selling 0.60 1.0
Probability of 0.80 0.90
Keeping Delivery
Schedule
Penalty for Not 50000 10000
making Delivery
schedule
Selling Price 900000 800000
Cost of third Party 30000 nil
Inspection
Probability of 0.80 0.90
collection of Sale
Amt

Should the businessman Go for selling the product in foreign market? Justify your
Answer
 0.80
(870000)
0.80
(556800)
0.20
0.6
(411600)
0.80
699200
(870000)
0.20
0.4 (287600)
(129200)
0.20
0.90
-
(800000)
648000
0.10
719000
0.90
71000
0.10
Conclusion
Project decisions, even quite simple ones, can be
difficult to make because their implications are often
not certain. This is a fact of life for most project
managers, who often face situations like those
explored above: the choice of alternative Export
market and of alternative Domestic market . Each of
these decisions poses clear alternatives but murky
consequences. Uncertain consequences are best
described and analyzed using probability concepts as
part of a decision tree analysis to maximize Expected
Monetary Value or minimize expected costs to the
organization.
Decision trees allow project managers to distinguish
between decisions where we have control and
chance events that may or may not happen. It takes
account of the costs and rewards of decision options
as well as the probabilities and impacts of associated
risks. although this may be influenced by the risk
appetite of the organization. The decision tree
technique offers a powerful way of describing,
understanding and analyzing uncertainty, and can be a
valuable part of the toolkit for any project manager
who needs to make decisions where the outcome is
uncertain.
The decision tree is of great significance since it will
provide you with benefits such as clarity, specify and
other advantages mentioned. As opposed to a typical
user, the decision tree may be developed by a domain
expert. This has assisted in optimizing the decision
making performance. Nevertheless, the decision tree
is used as a resource for designing the user tasks.
Therefore, you need to use the decision tree because
of the benefits highlighted.
THANK YOU