Decision tree is a mathematical tool that enables a decision maker to consider various alternative courses of action, and select the best alternatives. According to Paul Mali.
“It is a concept that examines which objectives are most likely to be reached, and the associate risk. The approach includes as many variables as necessary to provide a concrete background for decision-making on a proposed venture, and helps to anticipate faults that may occur in a proposed set of objectives before the objectives have completely committed”.
It is a graphical representation of possible actions and events utilising probability factor (also known as chance factor) that allows the decision maker to trace the most ‘optimum’ path through the tree diagram.
A decision tree is so called because it resembles a tree – the only difference being that it is drawn horizontally for the sake of convenience whereas tree is vertical in nature. The base of the tree is called ‘the decision point’ and -is normally represented by a square.
The branches of the tree begin at the first ‘chance event’-the chance event is represented by a circle. Every chance event produces two or more than two possible effects and then leads to subsequent decision points.
A manager calculates the different probability estimates, by careful researches that are associated with different chance events with the help of which he takes final decision.