Decision trees are one specific decision analysis technique and we will illustrate the technique by use of an example. It has to decide whether to proceed to test market M997 or whether to drop it completely. If M997 is successful at the test market stage then the company faces a further decision relating to the size of plant to set up to produce M997. Although the above example is somewhat simplified it plainly represents the type of decision that often has to be made about new products. To enable us to see what is going on consider the figure below where we have drawn the decision tree for the problem.
Terminal nodes represent the ends of paths from left to right through the decision tree.
It is worth saying here that the difficult part of the decision tree technique is drawing up a diagram such as the figure above from the written description of the problem. Once that has been done the solution procedure is quite straightforward. Note here that most, but not all, decision trees start with a decision node. Note that it is important for the decision tree to be drawn so that there is a unique path in the tree from the initial node to each of the terminal nodes. To do this we have two steps.