Constructing Decision Trees: A Business Case Study

The video tutorial explains how to construct decision trees using a business scenario where a company must decide whether to invest £10,000 to increase the probability of capitalizing on a £100,000 breakthrough. It covers decision nodes, chance nodes, and the calculation of probabilities and payoffs. The tutorial concludes with determining the optimal decision based on expected outcomes.

What is the main decision the business faces in the context of the decision tree?

• Whether to invest £10,000 to increase success probability

• Whether to expand the business internationally

• Whether to change the business model

• Whether to hire more employees

What are the two decision branches emanating from the decision node?

• Increase marketing budget or reduce costs

• Expand internationally or stay local

• Invest £10,000 or not invest

• Invest £10,000 or hire new staff

What is the probability of success if the business decides to invest?

• 30%

• 50%

• 60%

• 70%

What is the probability of failure if the business does not invest?

• 40%

• 50%

• 70%

• 60%

What is the final payoff if the business successfully capitalizes on the breakthrough?

• £75,000

• £100,000

• £150,000

• £50,000

What is the expected outcome if the business fails to capitalize on the breakthrough?

• £0

• £100,000

• £10,000

• £50,000

How does the business determine the optimal decision using the decision tree?

• By choosing the decision with the least cost

• By comparing the expected gains from each decision

• By following industry trends

• By selecting the decision with the highest risk