Decision Trees And Computer Simulation

Decision trees that follow the sequential nature of the decision-making process provide a logical framework for decision analysis under conditions of uncertainty. When a high degree of uncertainty exists and data are not readily available, computer simulation often provides

2 The terms and

t = 1 (1.15)t are present-value-of-an-annuity interest factors. Tables of interest factors for various interest rates and years (t values) appear in Appendix B.4.

the basis for reasonable conjecture. Application of these methods was once arduous and time-consuming. Today, new computer software fully automates the process of decision tree analysis and computer simulation. More than ever before, these techniques constitute useful and practical means for risk assessment and effective managerial decision making.

decision tree

Map of a sequential decision-making process decision points

Instances when management must select among choice alternatives chance events

Possible outcomes following each decision point

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