There is a large variety of tools available to help decision-makers. This paper focuses on one of these tools ù decision tree analysis. The consideration of the decision tree decision analysis tool begins with a review of the importance of modeling in decision analysis, and then proceeds to a discussion of decision trees. The final section of the paper includes an example of the application of decision trees in decision analysis.
The Importance of Modeling in Decision Analysis
Decision analysis includes the formulation of objectives; identification of resources and constraints; the formulation of appropriate assumptions; the development of alternative solutions; and the drawing of conclusions and the formulation of recommendations, with respectáto the selected alternative course of action. Once a decision maker has defined the problem correctly, the use of models has the advantage of allowing the analysis to focus more directly in the variables involved in the problem (Stokey & Zeckhauser, 1978). As an example, if a policy maker is concerned about the issue of global warming, there are several different approaches that could be applied to the analysis.
If the overriding focus is on minimizing the costs effects on today's economy of reducing greenhouse gases, the policy maker would select an economic model. The structuring of that model would measure the costs of reducing greenhouse gasses over a short-term period ù perhaps three years.
A policy maker who was more interested in the overall cost to society of alternative approaches to reducing greenhouse gasses, however, would likely structure the economic model to account for the costs and benefits to society over a long-term period ù perhaps 25 years. In contrast to the economic focus on the issue of global warming, another policy maker might be more concerned about the effects on human health or the deterioration of the physical environment. Such a policy maker...