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Decision Trees Choosing by projecting "expected outcomes"

Evaluate all of your options. iStockphoto Decision Trees are excellent tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can lay out options and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action. Drawing a Decision Tree You start a Decision Tree with a decision that you need to make. Draw a small square to represent this towards the left of a large piece of paper. From this box draw out lines towards the right for each possible solution, and write that solution along the line. Keep the lines apart as far as possible so that you can expand your thoughts. At the end of each line, consider the results. If the result of taking that decision is uncertain, draw a small circle. If the result is another decision that you need to make, draw another square. Squares represent decisions, and circles represent uncertain outcomes. Write the decision or factor above the square or circle. If you have completed the solution at the end of the line, just leave it blank. Starting from the new decision squares on your diagram, draw out lines representing the options that you could select. From the circles draw lines representing possible outcomes. Again make a brief note on the line saying what it means. Keep on doing this until you have drawn out as many of the possible outcomes and decisions as you can see leading on from the original decisions. An example of the sort of thing you will end up with is shown in Figure 1:

Once you have done this, review your tree diagram. Challenge each square and circle to see if there are any solutions or outcomes you have not considered. If there are, draw them in. If necessary, redraft your tree if parts of it are too congested or untidy. You should now have a good understanding of the range of possible outcomes of your decisions. Evaluating Your Decision Tree Now you are ready to evaluate the decision tree. This is where you can work out which

option has the greatest worth to you. Start by assigning a cash value or score to each possible outcome. Estimate how much you think it would be worth to you if that outcome came about. Next look at each circle (representing an uncertainty point) and estimate the probability of each outcome. If you use percentages, the total must come to 100% at each circle. If you use fractions, these must add up to 1. If you have data on past events you may be able to make rigorous estimates of the probabilities. Otherwise write down your best guess. This will give you a tree like the one shown in Figure 2: Calculating Tree Values Once you have worked out the value of the outcomes, and have assessed the probability of the outcomes of uncertainty, it is time to start calculating the values that will help you make your decision. Start on the right hand side of the decision tree, and work back towards the left. As you complete a set of calculations on a node (decision square or uncertainty circle), all you need to do is to record the result. You can ignore all the calculations that lead to that result from then on. Calculating The Value of Uncertain Outcome Nodes Where you are calculating the value of uncertain outcomes (circles on the diagram), do this by multiplying the value of the outcomes by their probability. The total for that node of the tree is the total of these values. In the example in Figure 2, the value for 'new product, thorough development' is: 0.4 (probability good outcome) x $1,000,000 (value) = $400,000 0.4 (probability moderate outcome) x $50,000 (value) = $20,000 0.2 (probability poor outcome) x $2,000 (value) = $400 + $420,400 Figure 3 shows the calculation of uncertain outcome nodes:

Note that the values calculated for each node are shown in the boxes. Calculating the Value of Decision Nodes When you are evaluating a decision node, write down the cost of each option along each decision line. Then subtract the cost from the outcome value that you have already calculated. This will give you a value that represents the benefit of that decision. Note that amounts already spent do not count for this analysis these are 'sunk costs' and (despite emotional counter-arguments) should not be factored into the decision. When you have calculated these decision benefits, choose the option that has the largest benefit, and take that as the decision made. This is the value of that decision node. Figure 4 shows this calculation of decision nodes in our example:

In this example, the benefit we previously calculated for 'new product, thorough development' was $420,400. We estimate the future cost of this approach as $150,000. This gives a net benefit of $270,400. The net benefit of 'new product, rapid development' was $31,400. On this branch we therefore choose the most valuable option, 'new product, thorough development', and allocate this value to the decision node. Result By applying this technique we can see that the best option is to develop a new product. It is worth much more to us to take our time and get the product right, than to rush the product to market. It is better just to improve our existing products than to botch a new product, even though it costs us less. 1. Introduction to neural networks 1.1 What is a Neural Network? An Artificial Neural Network (ANN) is an information processing paradigm that is inspired by the way biological nervous systems, such as the brain, process information. The key element of this paradigm is the novel structure of the information processing system. It is composed of a large number of highly interconnected processing elements (neurones) working in unison to solve specific problems. ANNs, like people, learn by example. An ANN is configured for a specific application, such as pattern recognition or data classification, through a learning process. Learning in biological systems involves adjustments to the synaptic connections that exist between the neurones. This is true of ANNs as well. 1.2 Historical background Neural network simulations appear to be a recent development. However, this field was

established before the advent of computers, and has survived at least one major setback and several eras. Many importand advances have been boosted by the use of inexpensive computer emulations. Following an initial period of enthusiasm, the field survived a period of frustration and disrepute. During this period when funding and professional support was minimal, important advances were made by relatively few reserchers. These pioneers were able to develop convincing technology which surpassed the limitations identified by Minsky and Papert. Minsky and Papert, published a book (in 1969) in which they summed up a general feeling of frustration (against neural networks) among researchers, and was thus accepted by most without further analysis. Currently, the neural network field enjoys a resurgence of interest and a corresponding increase in funding. For a more detailed description of the history click here The first artificial neuron was produced in 1943 by the neurophysiologist Warren McCulloch and the logician Walter Pits. But the technology available at that time did not allow them to do too much. 1.3 Why use neural networks? Neural networks, with their remarkable ability to derive meaning from complicated or imprecise data, can be used to extract patterns and detect trends that are too complex to be noticed by either humans or other computer techniques. A trained neural network can be thought of as an "expert" in the category of information it has been given to analyse. This expert can then be used to provide projections given new situations of interest and answer "what if" questions. Other advantages include: Adaptive learning: An ability to learn how to do tasks based on the data given for training or initial experience. Self-Organisation: An ANN can create its own organisation or representation of the information it receives during learning time. Real Time Operation: ANN computations may be carried out in parallel, and special hardware devices are being designed and manufactured which take advantage of this capability. Fault Tolerance via Redundant Information Coding: Partial destruction of a network leads to the corresponding degradation of performance. However, some network capabilities may be retained even with major network damage. 1.4 Neural networks versus conventional computers Neural networks take a different approach to problem solving than that of conventional computers. Conventional computers use an algorithmic approach i.e. the computer follows a set of instructions in order to solve a problem. Unless the specific steps that the computer needs to follow are known the computer cannot solve the problem. That restricts the problem solving capability of conventional computers to problems that we already understand and know how to solve. But computers would be so much more useful if they could do things that we don't exactly know how to do.

Neural networks process information in a similar way the human brain does. The network is composed of a large number of highly interconnected processing elements(neurones) working in parallel to solve a specific problem. Neural networks learn by example. They cannot be programmed to perform a specific task. The examples must be selected carefully otherwise useful time is wasted or even worse the network might be functioning incorrectly. The disadvantage is that because the network finds out how to solve the problem by itself, its operation can be unpredictable. On the other hand, conventional computers use a cognitive approach to problem solving; the way the problem is to solved must be known and stated in small unambiguous instructions. These instructions are then converted to a high level language program and then into machine code that the computer can understand. These machines are totally predictable; if anything goes wrong is due to a software or hardware fault. Neural networks and conventional algorithmic computers are not in competition but complement each other. There are tasks are more suited to an algorithmic approach like arithmetic operations and tasks that are more suited to neural networks. Even more, a large number of tasks, require systems that use a combination of the two approaches (normally a conventional computer is used to supervise the neural network) in order to perform at maximum efficiency.

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