6.1.6—Decision trees

A decision tree represents choices, uncertain outcomes and payoffs so expected values and risks can be compared.

Probabilities and payoffs are assumptions; expected value does not show dispersion or ethics.

Label branches, multiply payoff by probability, sum outcomes and test sensitivity.

A launch with 0.6 chance of $100k and 0.4 chance of −$20k has expected value $52k before cost.

The highest expected value is not always the safest choice.