Decision Trees have three main parts: a root node, leaf nodes and branches. The root node
is the starting point of the tree, and both root and leaf nodes contain questions or
criteria to be answered. Branches are arrows connecting nodes, showing the flow from
question to answer. Each node typically has two or more nodes extending from it.
For example, if the question in the first node requires a "yes" or "no" answer, there
will be a leaf node for if the answer is "yes" and another for if the answer is "no".
A Decision Tree can be used in either a predictive manner or a descriptive manner, depending
on its application. In either instance they are constructed the same way and are always used
to visualize all possible outcomes and decision points that occur chronologically. Decision
Trees are most commonly used in the financial world for areas such as loan approval,
portfolio management, and spending. A Decision Tree can also be helpful when examining
the viability of a new product, or new market for a current product.
- Start the tree. Draw a rectangle near the left edge of the page to represent the first node. In this rectangle, write the first question, main idea, or criterion that will lead to a decision.
- Add branches. For every possible alternative draw a separate line that begins at the node and moves away toward the right of the page. Using a loan approval process as an example, the first node may have been "Income", and the associated branches might be <$50K, $51K - $100K, >$101K.
- Add leaves. The bulk of the decision tree will be leaf nodes. At the end of each branch add a leaf node. Fill each of these leaf nodes with another question or criterion.
- Add more branches. Repeat the process of adding a branch for each possible alternative leading from a leaf. Label each branch just as before.
- Complete the tree. Continue adding leaves and branches until every question or criterion has been resolved and an outcome has been reached.
- Terminate a branch. When the outcome is reached, add an arrowhead to the end of the branch and write the result in plain text.
- Verify accuracy. Consult with all stakeholders to verify accuracy.