Decision-making takes place against a background of uncertainty about the future course of events. Consequently, in making decisions known costs are compared with expected pay-offs in the future. Decision trees provide a logical process for decision-making. The decision problem can be set out in the form of a diagram, like a tree on its side. It can take into account the occasions when chance will determine the outcome. Chance can be estimated by assigning probability. While the estimate of the probability may only be a guess, at least probability is quantitative and gives the decision process a scientific quality.
The kinds of problems which are suited to decision tree analysis are those where a sequence of events or options has to be followed in conditions of uncertainty. The types of decisions that lend themselves to the decision tree technique include:
Whether to introduce a new product or continue with existing products;
Whether to launch a new advertising campaign or continue with existing products;
Whether to sell off assets for a known price or continue to use them in conditions of uncertainty;
Whether to expand in one location or another.
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