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MATH540 Discussion 1


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The main parts of a decision tree are:
Decision: These are represented by squares. This is the starting point of the decision tree. The
decision to be analyzed forms this part; it has two arcs and options.
Sequence of events: These are represented by circle node and arcs and events, it provides
different probabilities for different events which have originated from the decision node.
Consequences: These are represented by triangles and give the result of the decision that has
been analyzed; the consequence sum of probabilities adds up to one.
Benefits of decision trees:
These are used for identifying a strategy that is most likely to reach the goal by modeling
decisions and probable outcomes; they can be used to display the rationale behind a decision in a
way to let others see better where the factors come to play. Decision trees are easy to understand
and interpret as even without data decision trees can describe decision situations and their
probabilities or desired outcomes.
In what way can decision trees be used in business decision making?
Almost all businesses face uncertainty at some point or other. In such situation decision trees are
used to select the best course of action. When businesses face unknown that seem to make it
impossible to choose the right option with any certainty, the decision tree comes to rescue of
managers. Although the manager does not know the result of the unknown, he would generally
have an idea on possible outcomes and how likely each would be to occur. This information can
be used to select the option that is most likely to yield a favorable result. Decision trees make
this type of analysis in a business scenario easy. Decision tree provides a credible perspective for
upper management; they help them form a balanced picture of the risks and rewards associated
with each possible course of action.
Real-world examples:
(a) Gerber Products, the well-known baby products company, recently used decision tree
analysis in deciding whether to continue using the plastic known as poly-vinyl chloride or more
commonly, PVC. The situation involved a number of organizations including the environmental
group Greenpeace, the U.S. Consumer Products Safety Commission, the toy and plastics
industries, and the general public.
(b) Another example, a manufacturer can use decision tree to decide how much inventory to
build before knowing precisely what the demand would be.
(c) It is also known that decision analysis is used in health care to assist physicians to make
treatment decisions about individual patients.

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(d) Decision tree can also be applied in real life for a situation as simple as a coin toss, the
decision tree shows two alternatives Bet and don't Bet. If bet is placed, there is an equal
likelihood of winning or losing.
Taylor, B. M. (2010). Introduction to management science (10th ed.). Upper Saddle River, NJ:
Pearson/Prentice Hall.
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