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Decision Tree

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Maulik Vasani
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155 views4 pages

Decision Tree

Uploaded by

Maulik Vasani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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A decision tree is the graphical depiction of all the possibilities or outcomes

to solve a specific issue or avail a potential opportunity. It is a useful


financial tool which visually facilitates the classification of all the probable
results in a given situation.

Terminologies Used

Let us understand some of the relevant concepts and terms used in the
decision tree:

● Root Node: A root node compiles the whole sample, it is then


divided into multiple sets which comprise of homogeneous
variables.
● Decision Node: That sub-node which diverges into further
possibilities, can be denoted as a decision node.
● Terminal Node: The final node showing the outcome which
cannot be categorized any further, is termed as a value or
terminal node.
● Branch: A branch denotes the various alternatives available with
the decision tree maker.
● Splitting: The division of the available option (depicted by a
node or sub-node) into multiple sub-nodes is termed as splitting.
● Pruning: It is just the reverse of splitting, where the decision tree
maker can eliminate one or more sub-nodes from a particular
decision node.

Steps in decision tree analysis

● The first step is understanding and specifying the problem area for
which decision making is required.
● The second step is interpreting and chalking out all possible solutions
to the particular issue as well as their consequences.
● The third step is presenting the variables on a decision tree along
with its respective probability values.
● The fourth step is finding out the outcomes of all the variables and
specifying it in the decision tree.
● The last step is highly crucial and backs the overall analysis of this
process. It involves calculating the EMV values for all the chance
nodes or options, to figure out the solution which provides the highest
expected value.

Advantages of Decision Trees

1. Easy to read and interpret


One of the advantages of decision trees is that their outputs are easy to read
and interpret without requiring statistical knowledge. For example, when using
decision trees to present demographic information on customers, the
marketing department staff can read and interpret the graphical
representation of the data without requiring statistical knowledge.

The data can also generate important insights on the probabilities, costs, and
alternatives to various strategies formulated by the marketing department.

2. Easy to prepare
Compared to other decision techniques, decision trees take less effort for
data preparation. However, users need to have ready information to create
new variables with the power to predict the target variable.

3. Less data cleaning required


Another advantage of decision trees is that there is less data cleaning
required once the variables have been created. Cases of missing values and
outliers have less significance on the decision tree’s data.

Disadvantages of Decision Trees

1. Unstable nature
A small change in the data can result in a major change in the structure of the
decision tree, which can convey a different result from what users will get in a
normal event.

2. Less effective in predicting the outcome of a continuous variable


In addition, decision trees are less effective in making predictions when the
main goal is to predict the outcome of a continuous variable. This is because
decision trees tend to lose information when categorizing variables into
multiple categories.

Levels of Decision Tree


In level-1 there will be 1 alternatives and from that he have to move
forward.

In level 2 there will be 2 alternatives and from that he have to move


forward.

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