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A Decision Tree represents a series of decisions that are linked through time. That is, after one
decision has been made, there may be any number of subsequent decisions. Moreover, the choices that
are available for future decisions depend on past choices. A diagram is very helpful in keeping track of
all of these details, and explaining the situation to others.
The diagram below illustrates the three types of Nodes on a Decision Tree:
Decision Nodes (Yellow), Probability Nodes (Blue) and Terminal Nodes (Gray).
Node 1 is a Decision Node, which means that you may choose among the outgoing branches.
The first choice would lead you to Node 2, where the payoff is 20.
The second choice goes to Node 3, payoff 10.
The third goes to Node 4, where the payoff is 10.4. (Explanation of this number is given below.)
The word Yes appears on the first branch because it has the highest payoff.
The word No appears on the other branches because their payoffs are lower.
The number 20 appears in Node 1 because that is what you get if you follow the best branch.
Probabilities
Tree 370326501.xls Page 3 of 6
Now Future
No PRO 150
Yes Test 167.5 0.75 Pasa 190 Yes STD 190 0.96 Funciona 250
No PRO 100