What Is a Decision Tree?

A decision tree is a diagram or chart that people use to determine a course of action or show a statistical probability. It forms the outline of the namesake woody plant, usually upright but sometimes lying on its side. Each branch of the decision tree represents a possible decision, outcome, or reaction. The farthest branches on the tree represent the end results.

Individuals use decision trees to clarify and find an answer to a complex problem. Decision trees are frequently employed in determining a course of action in finance, investing, or business.

The Basics of a Decision Tree

A decision tree is a graphical depiction of a decision and every potential outcome or result of making that decision. Individuals deploy decision trees in a variety of situations, from something simple and personal ("Should I go out for dinner?") to more complex industrial, scientific or microeconomic undertakings.

By displaying a sequence of steps, decision trees give people an effective and easy way to visualize and understand the potential options of a decision and its range of possible outcomes. The decision tree also helps people identify every potential option and weigh each course of action against the risks and rewards each option can yield.

An organization may deploy decision trees as a kind of decision support system. The structured model allows the reader of the chart to see how and why one choice may lead to the next, with the use of the branches indicating mutually exclusive options. The structure allows users to take a problem with multiple possible solutions and to display those solutions in a simple, easy-to-understand format that also shows the relationship between different events or decisions.

In the decision tree, each end result has an assigned risk and reward weight or number. If a person uses a decision tree to make a decision, they look at each final outcome and assess the benefits and drawbacks. The tree itself can span as long or as short as needed in order to come to a proper conclusion.

Key Takeaways

  • A decision tree is a graphical depiction of a decision and every potential outcome or result of making that decision.
  • People use decision trees in a variety of situations, from something personal to more complex business, financial, or investment undertakings.

How to Make a Decision Tree

To make a decision tree, you must start with a specific decision that needs to be made. You can draw a small square at the far left of the eventual tree to represent the initial decision. Then you draw lines outward from the box; each line moves from left to right, and each represents a potential option. Or you can start with a square at the top of a page or screen, and draw the lines downward.

At the end of each line, or option, you analyze the results. If the result of an option is a new decision, draw a box at the end of that line, and then draw new lines out of that decision, representing the new options, and labeling them accordingly. If the result of an option is unclear, draw a circle at the end of the line, which denotes potential risk. If an option results in a decision, leave that line blank. You continue to expand until every line reaches an endpoint, meaning you've covered every choice or outcome. Draw a triangle to indicate the endpoint.