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    1 Business Organisation and Environment: Key Term

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    Lissa Montiel
    This document discusses decision trees as a technique for business decision making. It defines key terms like decision tree, expected value, and chance node. It explains how decision trees visually represent options, possible outcomes, probabilities of outcomes occurring, and expected financial returns. An example is provided of a business deciding whether to hold a fundraising event indoors or outdoors, taking into account weather probabilities and potential profit amounts. Decision trees help managers systematically consider all variables, options, risks, and expected values to maximize returns.

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    1 Business Organisation and Environment: Key Term

    Uploaded by

    Lissa Montiel
    33 views1 page
    This document discusses decision trees as a technique for business decision making. It defines key terms like decision tree, expected value, and chance node. It explains how decision trees visually represent options, possible outcomes, probabilities of outcomes occurring, and expected financial returns. An example is provided of a business deciding whether to hold a fundraising event indoors or outdoors, taking into account weather probabilities and potential profit amounts. Decision trees help managers systematically consider all variables, options, risks, and expected values to maximize returns.

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    This document discusses decision trees as a technique for business decision making. It defines key terms like decision tree, expected value, and chance node. It explains how decision trees visually represent options, possible outcomes, probabilities of outcomes occurring, and expected financial returns. An example is provided of a business deciding whether to hold a fundraising event indoors or outdoors, taking into account weather probabilities and potential profit amounts. Decision trees help managers systematically consider all variables, options, risks, and expected values to maximize returns.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    33 views1 page

    1 Business Organisation and Environment: Key Term

    Uploaded by

    Lissa Montiel
    This document discusses decision trees as a technique for business decision making. It defines key terms like decision tree, expected value, and chance node. It explains how decision trees visually represent options, possible outcomes, probabilities of outcomes occurring, and expected financial returns. An example is provided of a business deciding whether to hold a fundraising event indoors or outdoors, taking into account weather probabilities and potential profit amounts. Decision trees help managers systematically consider all variables, options, risks, and expected values to maximize returns.

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    1 BUSINESS ORGANISATION AND ENVIRONMENT

    More detailed discussion of each of these causes led to the ● A circle shows that a range of outcomes may result
    factors laid out in the form of the ‘smaller bones’ of the fish. from a decision – a chance node.
    Stages in the fishbone process include: ● Probabilities are shown alongside each of these
    possible outcomes. These probabilities are the numer-
    1 Agree on the problem statement and write this in the ical values of an event occurring – they measure the
    centre of the whiteboard or screen. ‘chance’ of an outcome occurring.
    2 Brainstorm the main categories of the causes of the ● The economic returns are the expected fi nancial gains
    problem, or use the common generic ones (the 6Ms). or losses of a particular outcome – the ‘pay-offs’.
    These become the six main bones of the fish.
    Working out ‘expected values’
    3 Brainstorm all of the detailed reasons why problems
    might occur under each of these headings – the small KEY TERM
    fish bones.
    expected value the likely financial result of an outcome
    4 Analyse the fi ndings of the group as shown on the
    obtained by multiplying the probability of an event occurring
    diagram. Investigate the most likely causes of the
    by the forecast economic return if it does occur
    problem – more research might now be necessary.
    Therefore, the expected value of tossing a coin and
    Once this process has been completed the business can
    winning $5 if it comes down heads is 0.5 × $5 = $2.50.
    put strategies in place to remove the most likely causes
    In effect, the average return, if you repeated this a
    of the problem, perhaps by adopting different quality
    number of times, would be to win $2.50 – this is the
    assurance systems.
    expected value. The purpose of a decision tree is to
    show that option which gives the most beneficial
    DECISION TREES
    expected value.
    This is a technique that considers the value of the options
    For example, the manager of an events-organising
    available and the chances of them occurring.
    business has to decide between holding a fund-raising
    KEY TERM auction indoors or outdoors. The financial success of the
    event depends not only on the weather, but also on the
    decision tree a diagram that sets out the options connected
    decision to hold it indoors or outdoors.
    with a decision and the outcomes and economic returns that
    Table 6.2 shows the expected net fi nancial returns
    may result
    or ‘economic returns’ from the event for each of these
    different circumstances. From past weather records for
    This technique is based on a diagram that is drawn to
    August, there is a 60% chance of fine weather and a 40%
    represent four main features of a business decision:
    chance of it being poor. The indoor event will cost $2000
    to arrange and the outdoor event will cost $3000.
    ● all of the options open to a manager
    ● the different possible outcomes resulting from these
    options Weather Indoors Outdoors
    ● the chances of these outcomes occurring Fine $5 000 $10 000
    ● the economic returns from these outcomes.
    Poor $7 000 $4 000

    By comparing the likely fi nancial results from each Table 6.2 The possible economic returns from the alternative options
    option, the manager can minimise the risks involved
    and maximise the potential returns.
    The decision tree of the event is shown in Figure 6.3. This
    diagram demonstrates the main advantages of decision
    Constructing decision trees trees:
    The tree is a diagram, which has the following features:
    ● They force the decision-maker to consider all of the
    ● It is constructed from left to right. options and variables related to a decision.
    ● Each branch of the tree represents an option together ● They put these on an easy-to-follow diagram, which
    with a range of consequences or outcomes and the allows for numerical considerations of risk and
    chances of these occurring. economic returns to be included.
    ● Decision points are denoted by a square – these are ● The approach encourages logical thinking and discus-
    decision nodes. sion among managers.

    61

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