Okay, so now let's get a little bit pedantic and give you a definition here.

Formal definition of a decision tree is a graphical representation

of a decision tree problem which provides a mathematical solution,

in quotes, to the problem.

And I have solution in quotes because

this is actually going to provide us with one presumed best solution,

which under some circumstances, might not actually be the best solution.

In any event, a solved decision tree is always going to

give us the quote best path through the tree.

I put best in quotes because under certain circumstances as we'll see,

it might not necessarily be the best path.

But what the tree means when it says it's giving us the best path

through the tree is that it's the path that maximizes

the Expected Value of this Decision Tree, okay?

And they gives us the expected value, in dollar of taking "best" path.

Its also going to give us the probability of the tree's end points,

i.e the probability of ending at any particular branch of the tree.

These are called family terminal nodes and

it will give us the financial payoff, the net cash we're going to

wind up with if we get to that node at the end of the day on the tree.

So, a lot to throw at you, but it's all good.

It's all going to become clear once we start digging into an example.

Okay, as usual the grey slides I'm not covering,

If you want to be real pedantic, you can think about decision trees and

game theory, context, and look that up on the internet.

Okay, I'm going to be working with decision tree software called Tree Plan,

which is sold by a company I believe called Tree Plan, it's extremely cheap,

it works very well with almost all versions of Excel.

If you just Google TreePlan software, you'll find it.

You'll find it very quickly.

There are other TreePlan

decision tree software packages around those are equally find to use.

I'm just using TreePlan because I've used it for a long time,

and I'm familiar with it.

So using the TreePlan format,

graphic format, I'm going to go over on this slide.

Certainly not everything on this slide, which looks so confusing, but

I'm going to look over the important things for us on this slide, okay.

So here is a Decision Tree, and

the first thing to know about this Decision Tree

is that the X axis is always time or stage.