Decision Tree Tutorial in 7 minutes with Decision Tree Analysis & Decision Tree Example (Basic)
Hello!
Welcome back again to www.MBAbullshit.com.
The topic for this video is Decision Tree Analysis and this is the basic video on this
topic.
Remember, you can always go back to www.MBAbullshit.com.
This video completely explains the very basic Decision Tree concept.
After this, you’ll be ready for my next video on Decision Tree Exam Training to help
you pass or get high grades.
Let’s start with a story.
Let’s say you can choose between two business projects either a candy shop or a lemonade
stand.
Let’s say the candy shop can earn up to one hundred dollars and the lemonade stand
can earn up to ninety dollars.
Which one should you do?
Of course, the answer is quite easy and obvious; you should choose the candy shop in this simple
situation.
But what if, let’s make the story a step further.
What if the candy shop had a fifty percent chance of success and also had a fifty percent
of failure?
If your candy shop is a success, you would earn one hundred dollars.
If it was a failure, you would lose thirty dollars; it’s a negative sign there, a negative
thirty.
On the other hand, if you have a lemonade stand, you also have a fifty percent success
and a fifty percent chance of failure.
If it’s a success, you would probably earn ninety dollars and if it’s a failure, you
would probably lose ten dollars.
Which one do you choose now?
So now it’s not so simple.
Actually it’s very simple; you would use a simple formula like this.
Okay?
And it would look like this: fifty percent times one hundred dollars plus fifty percent
multiplied by negative thirty and we would get a figure here which we call an “Expected
Value.”
I’m going to explain that a little bit more in a while so just be patient.
Where do we get this fifty percent over here?
It’s the same as the fifty percent over here.
Where do we get the one hundred dollars over here?
It’s the same as the one hundred dollars over here.
Plus fifty percent over here, corresponds the fifty percent over here chance of failure,
multiplied by negative thirty or loss of thirty.
Where do we get that?
It corresponds the negative thirty dollars over here.
Now we come up with these thirty five dollars.
Then we do the same thing for the lemonade stand.
Fifty percent chance of success, ninety dollars that you would earn if it is a success plus
fifty percent chance of failure multiplied by the loss of ten dollars which you would
have if lemonade stands become a failure.
We end up with this formula over here and this figure over here: fifty percent times
ninety plus fifty percent multiplied by negative ten percent equals forty dollars.
So now, which one would you choose?
Obviously, would you choose the thirty five dollars?
Or would you choose the forty dollars?
Obviously, you would choose the forty dollars.
These forty dollars is what we call the “Expected Value” of the Lemonade project.
The “Expected Value” of the Candy project is thirty five dollars.
Since we are choosing a business, we choose the bigger one, the one with the bigger expected
value.
I promise you I speak more about expected value.
What do you mean by this?
Well, does this mean that if you do the Lemonade project, you will earn forty dollars?
Forty dollars over here.
Does this mean you will earn forty dollars?
No!
It means that if you did identical Lemonade projects very many times in exactly the same
situation as you have here.
If you did it very many times in exactly the same situation then your average earnings
will probably be forty dollars per time on the average.
So it does not mean, you’ll earn forty dollars each time and it certainly does not mean you
will earn forty dollars this time.
It just means that your average earning is forty dollars if in some strange world, you
had the chance to replicate or duplicate exactly the same situation many, many times.
Make sure that’s what you mean by that.
You understand that’s what we mean by Expected Value.
It’s different from everyday street language.
If you say, “Oh, I expect my friend to give me five dollars today.”
that means he probably will give you exactly five dollars.
But in MBA bullshit language, it means what I just explained right now, your average earning
in certain situation if you could replicate that same situation very many times.
Right.
So that’s how simple it is.
Okay?
Now you’re ready for my next video.
This video that we watched right now was a very simple example, not enough to pass an
exam or to get high marks or high grades but still you should have completely understood
at least the concept of this video.
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Have a great day!
Goodbye!
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