2.1 Describe decision alternatives and outcomes

You can now start your decision tree. A decision tree is a diagram of nodes and connecting branches. Nodes indicate decision points, chance events, or branch terminals. Branches correspond to each decision alternative or event outcome emerging from a node.

2.1.1 The first decision (root node)

Start by drawing a small square of the left side on a piece of paper. This is called the root node, or root. The root node represents the first set of decision alternatives.

For each decision alternative draw a line, or branch, extending to the right from the root node. Allow a generous amount of space between the lines to add information. Some branches may split into additional decision alternatives or outcomes. You can also “bend” branches so that they line up horizontally. These techniques make keeping track of alternatives easier, as shown in figure 2.1.1.

Figure 2.1.1 The root node is the small square at the left. Branch lines emerge from the root toward the right. Each branch represents one decision alternative.

The first decision node and branches

Label each branch with the decision and its associated investment cost. Write that the smoke and fire detector will cost (-$100,000) to develop. Similarly, write that the motion detector will cost (-$10,000) to develop. Write $0 at the third branch corresponding to the alternative to develop neither product.

arrow_blue_left Previous     Next arrow_blue_right