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3.3.3 Decision trees

Limitations:

  • Probabilities are just estimates – Always prone to error which may result in decisions based on inaccurate information thus resulting in wrong decisions being made. This can be very costly to the business, especially when considering the enormous amounts of money at stake in various business decisions such as whether or not to expand.
  • Uses quantitative data only – Ignores qualitative aspects of decisions which may sometime contradict the data shown. This may mean that the decision being made by the business does not account for important information thus resulting in bad decisions.
  • Assignment of probabilities and expected values prone to bias – This can result in inaccurate results which are skewed towards the outcome that the owner wanted rather than the true data. As a result of this, the business may make the decision that they wanted to make based on the biased data rather than the one that is best for the business.
  • Decision-making technique doesn’t necessarily reduce the amount of risk – There is always a certain amount of risk in every decision made by businesses contrary to the fact that the data shows that a certain decision will be favourable to the business. This is normally due to the dynamic nature of the external environment. For example, an unexpected recession or downturn in growth may result in what was deemed to be a profitable decision a decision that will lose the business a lot of money. This is because the decision was made based on the economic conditions during the decision making process. Therefore a change to this will change the outcome of the decision massively.

probability

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