What Is Decision Tree Analysis? 5 Steps To Making Better Decisions

Good or bad, every business decision has a consequence. If you are a decision maker for your business, you know how challenging it can be to decide on the best action plans, especially when you don’t know the outcomes.

Looking for a way to streamline your decision-making process and avoid risks? Choose decision tree analysis! It can help visualize the impact of your decisions to find a solution that best aligns with your company goals.

According to one report, companies use decision tree analysis to map-out potential impacts and solutions that can help make informed decisions on various things, from succession planning and relocating to outsourcing and downsizing.

This article will walk you through what a decision tree is and the five critical steps to making better decisions.

What Are Decision Trees?

Decision trees are flowcharts starting with one key idea or decision and branching out depending on the outcomes of every decision. It’s popularly known as decision tree analysis because the model resembles a tree.

Symbols Of Decision Tree Analysis

Here are the main decision tree symbols:

• Decision node (It shows a decision is being made)
• Chance node (Displays several uncertain outcomes)
• Alternative branches (every branch signifies a potential action or outcome)
• Rejected alternative (displays an option that wasn’t selected)
• Endpoint node (shows final outcomes)

Creating an effective decision tree analysis can be tricky. This is why many companies opt for the best decision tree generators to make tough choices with ease.

5 Killer Steps To Make Better Decisions With Decision Trees

Listed below are the five killer steps to make a decision tree to analyze uncertain outcomes and achieve the best possible decisions.

Start With An Idea

Start a decision tree with one key decision or idea. You’ll start your diagram with decision nodes before including branches to various decisions you decide between.

For instance, you intend to make an app; however, you’re unable to decide whether it’s best to upgrade the existing one or create a brand-new one. Use decision tree analysis to evaluate the outcomes each brings.

In this matter, your first (decision) node is:

• Making an app

Here are the three branches (options) you decide in-between:

• Create a mobile scheduling app
• Upgrade the current mobile scheduling app
• Create a team management app

Include Decision And Chance Nodes

After adding the central idea to your diagram, continue including decision or chance nodes after every decision to widen the tree further. Chance nodes may require alternative branches as there can be several potential outcomes for choosing them.

For instance, if you’re creating a new mobile scheduling app, chances are your company revenue will increase substantially if customers love the app.

However, there’s also a possibility that the app fails to attract customers, resulting in low revenue. Make sure to map out all the possible outcomes in your tree.

Expand Until It Reaches Endpoints

Keep adding decision and chance nodes to decision trees till you can’t add more. Now, include end-nodes to the tree.

You can start analyzing all decisions after completing the decision tree.

Calculate Values

Ideally speaking, a decision tree uses quantitative data. Although a wide variety of data is utilized in decision tree analysis, the most popular is “monetary values.”

For instance, upgrading or even creating an app will cost your business lots of money. It can cost you less or more if you’re making an application over another.

Writing down these monetary values in a tree under all decisions can help in decision-making processes. In addition, you can even measure the expected values you’ll create – small or big – for every decision.

When you know the costs and probabilities for sure, you can measure the expected values of all outcomes using this formula:

• EV (expected value) = (first potential outcome x likelihood)+(second potential outcome x likelihood)– incurred cost

Estimate expected values by multiplying each potential outcome by its likelihood and add these values afterward. Then, subtract initial expenses from the total, and you’ll get your expected value.

Assess Outcomes

When you have the expected outcomes, you can decide which is better for your company based on the risk you intend to take.

It’s important to note that the highest values aren’t always the best to go with because they have higher risk factors despite getting high rewards.

Also, expected values utilize probability algorithms. So, find an effective way to best assess decision tree analysis outcomes.

Takeaway

Decision trees are a must for companies of all sectors and industries. Using a decision tree generator, you can easily add elements to the flowchart, estimate tree values, and make necessary changes.

Moreover, the decision tree maker will boost your decision-making ability so that you can manage projects and lead the team successfully, helping your business expand exponentially.