Rating (3.5 out of 5 Stars)
Note: This post represents the synthesis of the thoughts, procedures and experiences of others as represented in the 8 articles read in advance (see previous posts) and the discussion among the students and instructor during the Advanced Analytic Techniques class at Mercyhurst University in March 2013 regarding Decision Tree Analysis specifically. This technique was evaluated based on its overall validity, simplicity, flexibility and its ability to effectively use unstructured data.
Decision tree analysis is a technique that helps determine the best course of action by analyzing the costs, benefits, and the probability of success for possible decisions. The technique has multiple branching paths, beginning with the question on the right, followed by possible courses of action, with their costs, benefits, and their probability of success. The technique combines these three items to determine the expected value, or EV. The EV number signifies the final product of the process.
- Can be built in multiple directions
- Give the ability to work through potential future outcomes
- Easy to grow beyond manual computational capacity
- Limits the innovation of potential products/decisions
- Rely on others to gain some numerical information -- it is difficult to determine where the probability numbers originate
- Doesn’t ferret out incorrect information or information that is intended to be deceptive
- Decide which direction the analysis will go
- Start with a central idea and branch out
- Start with many factors and work towards a central idea
- Label items consistently and appropriately
- Compute relevant figures to show all options
- Select the option with the highest potential benefit which accounts for costs
Personal Application of Technique:
The class collaboratively built a decision tree to identify the product development strategy the hypothetical company Really Big Ideas, Inc. should pursue. The company could chose to develop one of two new products, a motion detector or fire and smoke detector, or neither product. Three nodes were added from the root of “product development” to demonstrate the company’s options, with the links indicating the cost related to each option. Next, nodes were linked to the applicable areas to demonstrate the potential success or failure of each product, based on a percentage. A mathematical formula (Estimated Value= [Potential Revenue * Chance of Success] + [Potential Cost * Chance of Failure]) was used to determine which decision rule would produce the largest profit margins.