Impact on the Level of Customer Service

Decision Tree

The way probability affects finance can be presented in a decision tree. Like a real tree, a decision tree contains several parts that act together or cohere which present step by step a strategic plan of decision making. These parts are series of nodes and branches that breaks down the major problem into series of sub-problems to be solved independently in a particular order. In the study done by Magee found that a decision tree of any size will always combine (a) action choices with (b) different possible events or results of action which are partially affected by chances or other uncontrollable circumstances. This can include management of choices, objectives, monetary gains and information involved in an investment problem. In short the decision tree helps to lay out those decisions, events and results that have consequences. Here is an example of the discussion that was done by Magee.

[In this example you should]…decide whether to approve a development budget for an improved product. You are urged to do so on the grounds that the development, if successful, will give you a competitive edge, but if you do not develop the product, your competitor may- and may seriously- damage your market share. You sketch out a decision tree that looks something like the one below:

An example of a decision tree with a chain of actions and events

Your initial decision is shown at the left. Following a decision to proceed with the project, if development is successful, the second stage of decision is at Point A. Assuming no important change in the situation between now and the time of Point A, you decide now what alternatives will be important to you at that time. At the right of the tree are the outcomes of different sequences of decisions and events. These outcomes, too, are based on your present information. In effect you say: ‘If what I know now is true, then, this is what will happen’.

The Decision Tree here shows that the host at the...