3.3 Outcome probability

A chance node leads to two or more outcomes, each outcome represented by a new branch. As with a game of chance, an outcome has a particular probability of happening. The total of all outcomes for a given chance node must equal 100% (or 1.0).

A standard decision tree convention expresses probabilities as decimal fractions in parentheses at the chance branches.

Figure 3.3
3_3


icon_example Example
In Figure 3.3, the decision alternative to develop a project immediately can lead to one of three outcomes. The company has determined that there is a 20% chance that the project can meet all the criteria for success in international and domestic markets, but a 50% chance that the project will meet only the criteria for the domestic market. In addition, there is a 30% chance that the project will not meet enough criteria for either market because of insufficient information.

The company can also wait for a marketing study before developing the project. The marketing information may help the company create a successful project. But the information may also suggest unfavorable conditions that the company probably cannot overcome. Using its best judgment, the company estimates that the marketing study has a 50% chance of providing favorable data.

The decision tree shows these probabilities as decimal fractions in parentheses on their respective chance branches.

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