Using Decision Trees to Maximize Expected Value
Discover the Source of Tomorrow's Profits
Warren Buffett once said, "Someone's sitting in the shade today because someone planted a tree a long time ago." In the same way, tomorrow's profits may come from a strategy chosen from a decision tree you create today.
A decision tree is a diagram that shows:
- Decisions to be made
- Uncertainties
- Potential outcomes
- The probability of each outcome
Decision trees show the sequence of possibilities. Every path through the tree is a scenario for which we can calculate an expected value.
The tree shows a range of outcomes, their probabilities, and the value of those outcomes. This helps us assess and clearly communicate both the expected value and risk. We can better help discover the odds and amount of the money we could gain – or lose.