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.
Remember to share it if you like it.
On twitter, simply @MBAbullshit, www.facebook.com/MBAbullshit
is the place to go to find out the latest
update from me and the latest videos.
Please do forward our YouTube videos links
on your email.
Have a great day!
Goodbye!
debbierojonan Page 1
