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Updated May 07, 2024

What Is a Decision Tree?

Decision trees are flowchart graphs or diagrams that explore all potential decisions and their possible outcomes.

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Written By: Sammi CaramelaBusiness Operations Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.
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Business Strategy Insider and Senior Editor
Business News Daily earns compensation from some listed companies. Editorial Guidelines.
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In business, many decisions must be taken seriously because they have wide-reaching implications for the company, its employees, its customers or the public. For these decisions, it’s essential for business leaders to examine all of their options. One business decision-making tool is a decision tree.

Decision trees help professionals and company leaders make more informed choices by allowing them to weigh and visualize various options and outcomes. Here’s how to use a decision tree at your business.

What is a decision tree?

A decision tree is a flowchart graph or diagram that explores all potential decisions and their possible outcomes.

Each “branch” of the tree represents one of the decision’s potential outcomes. The branches can be extended when one alternative outcome leads to another decision you’ll need to make. Incorporated into each branch are the costs associated with each choice and the likelihood of its occurrence.

Because decision trees require numerous calculations, many businesses use dedicated decision tree software to help them with the process. Decision tree software helps businesses draw their trees, assign values and probabilities to each branch, and analyze each option. There are both free and paid versions of decision tree software available from vendors such as IBM, TreeAge, SmartDraw, Palisade, Angoss and Edraw.

Did You Know?Did you know
Setting achievable business goals is one of the first steps in decision-making.

How to draw a decision tree

Decision trees help business owners and leaders understand the risks and rewards associated with each decision. These include all possible outcomes, both positive and negative. Here’s how to create a decision tree.

  1. Start with a square box — representing the decision you must make — on the top or left side of a page.
  2. From that box, draw out each option — either down, if you’re starting at the top of the page, or to the right, if you’re starting on the left side. On each line, write the option.
  3. Draw a circle around any uncertain option, and draw a box around any option that requires a further decision, with lines going to additional outcomes.
  4. Continue this process until you’ve drawn as many possible outcomes and decisions as you believe can come from the original decision.

Once you’ve drawn the tree, analyze it to determine what each branch and outcome means. Assign values to the possible outcomes, and estimate the probability of each one. With those numbers, you can calculate which option is best.

The benefits of using a decision tree

Using a decision tree to explore and compare potential outcomes can provide many advantages.

  • A decision tree makes it easy to understand and interpret information. A decision tree is easy for people to read, even for those who may not be well versed in statistical analysis.
  • A decision tree is simple to prepare. As long as you have the information, creating a decision tree is more straightforward than other decision-making techniques.
  • A decision tree reduces data cleaning. According to the Corporate Finance Institute, because less data cleaning is required after you’ve created the variables for the decision tree, “cases of missing values and outliers have less significance on the decision tree’s data.”
TipTip
For more complex situations, you can combine decision trees with other decision-making techniques, such as a decision matrix, a Pareto analysis, a conjoint analysis and a SWOT analysis.

Examples of how businesses use decision trees

Decision trees can help companies make informed choices about a wide range of business areas, including the following: 

  • Pricing products or services
  • Promoting employees
  • Offering training to employees
  • Selling the business
  • Hiring contract workers

Decision tree examples

To better understand how decision trees work, consider some examples. For instance, say you’re deciding between hiring a full-time employee and working with a contractor. For this decision tree, separate your two options into different boxes. Then, branch those out into various outcomes, including some benefits or downfalls you might experience from making that particular choice.  

Alternatively, create two separate decision trees — “Should I hire a full-time worker?” and “Should I hire a contract worker?” — and then dive deeper into each choice. Then, break down the question into two boxes: “Yes” and “No.” From there, explore the outcomes by asking further questions, like “Is this necessary for our company’s workload?” Then, add “Yes” and “No” boxes. Continue this until you’ve exhausted all options and solutions and have determined all possible outcomes. 

Key TakeawayKey takeaway
Creating a decision tree will help you narrow down your options and choose the ones that are best for your company.

Using a decision tree in the workplace

Using a decision tree is a great way to make more informed decisions for your business. No matter how many options you’re weighing, breaking them down into different branches and boxes will allow you to understand any potential outcome that might benefit or harm your company. 

If you have a business idea or question regarding your business operations, consider turning to a decision tree as your solution. You can use a decision tree template or simply create your own decision tree using the above tips and examples.

Chad Brooks and Sean Peek contributed to this article.

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Written By: Sammi CaramelaBusiness Operations Insider and Senior Writer
Sammi Caramela is a trusted business advisor whose work for the U.S. Chamber of Commerce and others centers around creating digestible but informative guidance on all things small business. Whether she's discussing cash flow management or intellectual property, work trends or employer branding, Caramela provides actionable tips designed for small business owners to take their entrepreneurship to the next level. At Business News Daily, Caramela covers business basics, from choosing the right location for your establishment and what to look for in a business bank account to testing your ideas and connecting with customers. Caramela, who also lends her expertise to the financial outlet 24/7 Wall St., has business management experience that allows her to provide personal insights on day-to-day operations and the working relationship between managers and independent contractors. Amidst all this, Caramela has found time to publish a young adult novel, develop a poetry collection and contribute short stories to various anthologies.
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