Essay on Decision Tree

Introduction of Decision Tree

The aim of this paper is to provide deep insights regarding the decision tree approach and how decision tree helps the management of the organization to take right decision. In the paper the whole process of making a decision tree is described. The decision tree approach is adopted in the response of the situation which is experienced by the operational manager of cereal producer. Through creating the decision tree, the operation manager will have enough information regarding which option should be selected and how that option will create profit for the organization. Below is the complete process of developing a decision tree in detail.

Process of developing a decision tree

The operation manager of the cereal producer has three options to choose from, which include a large scale investment, a small scale project, and continue operation with no change. In order to take the best project the operation manager has decided to utilize the decision tree approach. A decision tree is a decision support instrument that helps the manager of the organization to make the right decision. The decision tree approach includes various steps which are explained in detail as follows:

1.      Drawing decision tree that represents investment options to the operation manager

The first phase of the design tree development process is to begin tree by creating the decision point and node. It means that the tree begins with a square. As there are three options available to the operation manager, three lines will be radiating from the square that will represent three options that are available to the manager (Mittal, Khanduja, & Tewari, 2017). The first can be easily understood from the following figure which represents decision options.

2.      Adding Chance Nodes, Probability & Outcomes

The second phase of the decision tree is to add chance nodes. In the decision tree, the options have different outcomes. So the option will end with outcome. This is marked by creating circle. The operation manager has two outcomes for the investment options, whereas the third option of no change as no outcome, so its outcome will not be shown in the decision tree (Mittal, Khanduja, & Tewari, 2017). The below figure is showing the decision tree with options & their respective probabilities.

3.      Evaluating the expected values of Decision Tree

The third step in the decision tree making process is evaluating the expected values of the options. At the right side of the decision tree, the expected values are calculated by multiplying the probability of the options with the outcome of the option. After this the answers should be added for every option. The answers should be mentioned in the appropriate circle in the decision tree (SONG & LU, 2015). The figure below is showing the decision trees diagram with returns and outcomes.

4.      Evaluating the Net Expected Value of Decision Tree

The last step of the decision tree process is to find out the net expected value of the options or the actual costs of the options. The initial investor, the cost of each option, is subtracted from the expected value of each option. After subtracting the cost calculations are presented on the decision tree. Those options will be rejected which have lower net expected value and that option will be selected which has the highest net expected value. The decision regarding the option is taken on the basis of net expected value of the option (SONG & LU, 2015). The below figure is showing a complete decision tree diagram.

Final Decision for Operation Manager of Decision Tree

If the complete decision tree is analyzed critically than it can be seen that the large scale investment have the net expected value of 1,800,000 Saudi Riyal which is higher than the net expected value of small scale project that is 5,62,500 Saudi Riyal. Therefore it is advised to the operational manager to select large scale investment because it has a higher net expected value than the small scale project. The small scale project and continue without change options should be rejected, and large scale investment should be perused because this decision will be more profitable than other decisions (Mittal, Khanduja, & Tewari, 2017).

References of Decision Tree

Mittal, K., Khanduja, D., & Tewari, P. C. (2017). An Insight into “Decision Tree Analysis.” World Wide Journal of Multidisciplinary Research and Development, 3(12), 111-115.

SONG, Y.-y., & LU, Y. (2015). Decision tree methods: applications for classification and prediction. 27(2), 130–135.