Decision Trees in Business Analysis

The video tutorial introduces decision trees as a graphical method for evaluating business decisions and probabilities. It explains the components of decision trees, including square and circle nodes, branches, and probabilities. The tutorial covers how to assign monetary values and calculate expected values, and it demonstrates the folding back process to arrive at a final decision. An example problem involving a software company is used to illustrate these concepts.

What is the primary purpose of using decision trees in business?

• To eliminate business risks

• To graphically represent decision sequences

• To ensure product quality

• To calculate exact profits

In a decision tree, what does a square node represent?

• A point of uncertainty

• A decision point

• A successful outcome

• A failed outcome

What is indicated by a branch coming out of a circle node?

• A guaranteed profit

• A decision to be made

• A loss in business

• A possible outcome of an uncertain event

How are monetary values represented in a decision tree?

• At the start of the tree

• On the branches

• Inside the nodes

• At the end of the tree

What is the expected monetary value approach based on?

• The sum of all costs

• The average of all outcomes

• The probability-weighted sum of outcomes

• The highest possible profit

What is the folding back process in decision trees?

• A process to evaluate and simplify the tree

• A method to expand the tree

• A technique to increase probabilities

• A way to add more nodes

In the example problem, what is the main decision the software company needs to make?

• Whether to produce in-house or subcontract

• Whether to expand to new markets

• Whether to increase product price

• Whether to hire more employees

What is the probability of success if the software company produces the work in-house?

• 50%

• 70%

• 90%

• 100%

What is the cost of subcontracting the work in the example problem?

• $20 million

• $30 million

• $40 million

• $50 million

If the software is delivered late, what is the revenue the company will earn?

• $20 million

• $60 million

• $80 million

• $40 million