3.1 Decision tree notation (nodes and branches)

Any decision includes two or more decision alternatives. Any decision alternative might lead to multiple possible outcomes. One outcome may depend on another, a situation called dependent uncertainty. Decisions may also link together in a sequence, a condition called sequential decisions. Use decision tree notation to keep these myriad paths and possibilities easy to understand and compare.

Figure 3.1
3_1


Example icon Example
In figure 3.1 a company is evaluating whether to invest $1,000,000 in a project immediately or wait for a marketing report that may affect project development.
Two other alternatives are also possible: invest $1,000,000 in a fixed yield bond or do nothing. A fixed-yield investment and doing nothing are examples of baseline alternatives: choices that can be used to compare the overall merits of the decision alternatives.

3.1.1 Decision nodes and the root node

Small squares identify decision nodes. A decision tree typically begins with a given “first decision.” This first decision is called the root node. For example, the root node in a medical situation might represent a choice to perform an operation immediately, try a chemical treatment, or wait for another opinion.

Draw the root node at the left side of the decision tree.

3.1.2 Chance nodes

Small circles identify chance nodes; they represent an event that can result in two or more outcomes. In this illustration two of the decision alternatives connect to chance nodes. Chance nodes may lead to two or more decision or chance nodes.

3.1.3 Endpoints

An endpoint, or termination node, indicates a final outcome for that branch. Small triangles identify endpoints. Show an endpoint by touching one point of the triangle to the branch it terminates.

3.1.4 Branches

Lines that connect nodes are called branches. Branches that emanate from a decision node (and toward the right) are called decision branches. Similarly, branches that emanate from a chance node (and toward the right) are called chance branches. A branch can lead to any of the three node types: decision node, chance node, or endpoint.

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