Decision Trees and Scenario Planning

Decision Trees and Scenario Planning

  • Submitted By: chaf80
  • Date Submitted: 01/29/2009 11:24 AM
  • Category: Business
  • Words: 462
  • Page: 2
  • Views: 647

According to Goodwin & Wright (2004), there are several characteristics of scenario planning and decision trees, which are useful when dealing with uncertainty in the business environment. They explain that a scenario focuses on key uncertainties and certainties about the future and uses this information to construct a clear picture in an information-rich way in order to provide good descriptions of the future situation(s). On the other hand, they state that “subjective probabilities entered into a decision tree can provide numerical values that can be used in an expected utility calculation” (Goodwin & Wright, p. 379). But unlike in scenario planning, the judgment process that gives these calculations is often not recorded or verbalized.

The authors mention that thinking in scenarios can be used as a way of evaluating decision options; it can avoid the need to think probabilistically and allows a variety of viewpoints about the future to be reflected. This means that scenario planning basically focuses on the reasoning underlying judgments about the future (situations) and gives explicit attention to sources of uncertainty. This is done without trying to turn an uncertainty into a probability.

Scenario planning can help people in understanding and making sense of a situation with use of clear story telling. Because in scenario planning the focus is on causality, Goodwin & Wright mention Kees van der Heijden, who argues that the approach is intuitively more attractive to managers than approaches such as decision trees (which are in essence “ways of choosing between gambles with different expected values or utilities” (Goodwin et al., p.409)). Also an argument is that decision tree analysis requires a strict, but yet static definition of a decision problem.

Where there is a disagreement between individuals about their subjective probabilities for a critical event, scenario planning explores in detail what the reasoning processes are which underlines the...

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