A decision tree is a graphical representation of the possible outcomes of an event with the associated risks. It organizes information to assist in decision making. Each open circle represents a chance for something different to happen.  The better you understand risk, the better you can manage it.

In the example above, we see the initial opportunity (first empty circle) on the far left has three sub-outcomes (1,2;3) that lead to final outcomes A-E. The value of each outcome (A-E) is the product of the percentage risk times the outcome. The value of the total opportunity is the sum of those weighted outcomes. In this case:

A=$50,000 (e.g. 50% of $100,000)
B=$12,500
C=$4,000
D=$100
E=($5,000)
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$61,600        SUM   The total weighted value of the opportunity is the sum of the weighted outcomes or $61,600.

You now can compare this option with others to make a choice or you can reduce the risk for any branch of the tree to increase its probable value. In other words, you can focus your efforts where they will count and take action to increase the probability that a better outcome will occur.

Cost Reduction & Profit Improvement
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