When there are several options to choose from, the decision tree analysis can be a wise alternative to choose and judge among the various options. It gives a structure or model that is effective to investigate the various probable outcomes of each option. It also helps to design a balanced and rational picture of rewards and risks that are associated with each possible optional action.
There are some rules associated with the use of decision tree analysis. When a business needs to take a decision on say, two courses of actions, the decision is represented in a small square drawn at the left of a piece of paper. Now each possible and probable solution is written on right of the paper along the lines drawn from the square. At the end of the lines the results are considered. The lines should be drawn keeping distance from another so that no complexity arises later.
The results can be either decisions or uncertain decisions. If the result that is considered is a decision then another square is drawn there and the same process is followed again. If the result is an uncertain decision then it is denoted by a circle in the decision tree. The decision is written above the circle or square. The possible outcomes resulting from the circle are also represented by drawing lines. The entire process is repeated until the final outcomes of the decision are reached.
The evaluation of the decision tree analysis is carried out by assigning cash value against each possible result or outcome. After working out on the outcome values and assessing the probability of each result and outcome, the value to keep a particular decision is calculated.
With the proper application of decision tree analysis technique, the best possible option that is required to develop a new service or new product can be obtained. It also gives the best decision depending on the available information. It also gives a framework for calculating the outcome values.
