Part 2. MM4XL Tools > 1. Strategic Tools > Decision Tree > 1. An Example as an Appetizer > Take Less Risk

Decision Tree

Take Less Risk

We can tell DTree to take into account the investors attitude toward risk. To take less risk, we impose on the example above a Risk attitude index that makes the selection criteria more cautious. The lower the index the more risk averse the model, and vice versa. In the following sections of this chapter there is more to read about how to take into account the investors attitude toward risk.

We used R equal to 84 to draw the tree below and the best decision shifted from the risky Surgery venture to the less greedy and yet still rewarding Coat business. According to a risk-averse decision-maker's common sense, this can be seen as a reasonable alternative decision. Indeed, it requires the lowest investment among the three most remunerative strategies, it is estimated to provide a reasonable sales level, and it does not incur the risk of loss.

The IT strategy was less appealing to the model because it implies a higher degree of uncertainty due to the fact that this branch requires 2 decisions to be made: (1) whether to enter the market, and (2) whether to enter it with a partner or not. The higher uncertainty coupled with a rather low expected value for the IT strategy made this option less appealing then the Coat one.

Decision Tree Software for Business and Management Model Making

Good modelling is a matter of exercising logical reasoning. The great advantage of having such models available is that managers can easily and quickly change scenarios to look at the same issue from different perspectives.

The more accurate the information used for building the tree the more the result of the analysis will be shared and supported by the decision maker, often a team of people with different backgrounds and outlooks.

At first the whole topic of decision analysis may seem hard to master. However, believe us, it is worth the effort!

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