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6
Decision trees and influence
diagrams
Introduction
When they are first encountered, some decision problems appear to
be overwhelmingly complex. Any attempt at clear thinking can be
frustrated by the large number of interrelated elements which are
associated with the problem so that, at best, the unaided decision
maker can have only a hazy perception of the issues involved. In these
circumstances, decision trees and influence diagrams can be extremely
useful in helping people to gain an understanding of the structure of the
problems which confront them.
We have already introduced some very simple decision trees in
Chapter 5, but here we will extend the idea to show how multi-stage
problems can be modeled. Decision problems are multi-stage in character
when the choice of a given option may result in circumstances which
will require yet another decision to be made. For example, a company
may face an immediate decision relating to the manufacturing capacity
which should be provided for a new product. Later, when the product
has been on the market for several years, it may have to decide whether
to expand or reduce the capacity. This later decision will have to be
borne in mind when the initial decision is being made, since the costs
of converting from one capacity level to another may vary. A decision
to invest now in a very small manufacturing plant might lead to high
costs in the future if a major expansion is undertaken. This means that
the decisions made at the different points in time are interconnected.
As we will see, decision trees can serve a number of purposes when
complex multi-stage problems are encountered. They can help a decision
maker to develop a clear view of the structure of a problem and make it
easier to determine the possible scenarios which can result if a particular
course of action is chosen. This can lead to creative thinking and the
generation of options which were not previously being considered.