Decision Tree Template Basics
A decision tree template gives the ability to see options and estimated outcomes before decisions are made. Such template can be used by almost any type of organization, to make simple or complex decisions, on a qualitative or quantitative basis. These diagrams might be used to establish a pricing policy, decide the size of a new plant, determine which research projects to pursue, or decide which proposal to accept.
This method is helpful in planning a project or making a series of related decisions. It is used to look ahead at the various possible outcomes and map the specific decisions needed and their impact on outcomes. It relies heavily on management judgment, providing structure to the normal judgmental decision-making process. The method is easily used and, once mastered, is a useful back-of-the-envelope technique. It is also useful in presenting a project or problem to a group in a structured manner to get feedback on a decision or the assumptions on which the decision is based.
Decision Tree Template Creation
Follow these four steps when designing a decision tree.
1. Identify all of the feasible alternatives—the different decision options available to you. Also identify the different situations that might prevail after the decision, focusing on a variable (or several) of relevance to the ultimate outcome of your decision.
Example: You must decide how much to spend on a new product launch. The marketing department presents three alternatives: low, medium, and high advertising and sales support. These are your feasible alternatives. You see two likely situations after introducing the product: (1) no competition and high demand or (2) a similar product introduction by a competitor and lower demand for your new product.
2. Draw a decision tree illustrating the decision alternatives and the situations.
Decision Tree Template Example 1
3. To calculate the possible financial returns from each combination of decisions and situations, enter the costs of each decision on the diagram (negative numbers) along with the incomes (positive numbers) from each situation and total them to calculate the payoffs. Write the payoffs (outcomes) at the right side of the diagram.
Decision Tree Template Example 2
Use decision tree templates to:
- Identify the options and potential outcomes of a decision or series of related decisions.
- Assign probabilities to events and calculate the likely returns from alternative decisions.
- Structure the decision task to identify where and how research should be used.
Fill in the Decision Tree Template with your own data and thoughts!