IB BM – Decision Trees Interactive Simulator

Welcome to the Decision Trees simulator

This interactive workbook helps students build, calculate, interpret and decide using decision trees in IB Business Management.

BM finance toolkit

What students should be able to do

Recognise the difference between a decision point, an outcome node, a probability and a monetary value.
Calculate the expected monetary value (EMV) for each option.
Use the results to make a financial recommendation.
Explain why decision trees are useful and what their limitations are.

💡
            Key idea: A decision tree does not remove uncertainty. It gives managers a clearer, more structured way to compare risky options using probabilities and financial outcomes.
          

How this simulator works

Start with the worked example and drag the right labels into the right parts of the tree.
Move to the three practice scenarios and fill in the missing probabilities, values and EMVs.
Interpret the results and choose the best option based on the data.
Use the flashcards and quiz to secure the language.

Decision-tree flow

EMV = (probability of success × success value) + (probability of failure × failure value)

Choose the option with the highest EMV if deciding purely on expected financial return.

Students should still remember that the best numerical answer is not always the final business answer. Managers may also consider reputation, strategic fit, speed, confidence in the data, and risk appetite.

How to construct a decision tree

The tree is a visual way to compare multiple options and their possible outcomes.

1 structure

Decision point: the square or starting choice where the business must choose between different options.

Outcome node: the point where different outcomes can happen, often success or failure.

Probability: the estimated chance of each outcome happening.

Monetary value: the financial result linked to each outcome, such as profit or loss.

Expected monetary value (EMV): the weighted average return found by multiplying each outcome by its probability and adding them together.

What the structure is showing

Decision point

Choose one option

Options

Option A

first strategic route

Option B

second strategic route

Outcome node + probabilities

Successp = 0.70

Failurep = 0.30

Successp = 0.60

Failurep = 0.40

Monetary values

+ £420,000

− £24,000

+ £480,000

− £32,000

EMV

£286,800higher EMV

£275,200lower EMV

Quick check

1. What does EMV help a manager estimate?

2. Which part of the tree tells you how likely something is to happen?

Using judgement: why decision trees help — and where they fall short

A strong IB answer should not stop at the calculation.

2 evaluation

Why decision trees were useful

They force managers to compare all options systematically rather than relying on intuition.
They require managers to research probabilities and likely outcomes, improving the quality of the decision process.
They quantify risk, so managers can see both best-case and worst-case scenarios.
They provide a clear, logical justification that can be shown to investors or stakeholders.

Limitations of decision trees

Probabilities are only estimates, so the real outcome may differ from the prediction.
Managers may be biased or over-optimistic when assigning values or probabilities.
Not every consequence can be measured in money, such as brand image, staff morale or customer loyalty.
EMV is an average expected value, but the business will experience only one real outcome.

Exam-ready interpretation: If one option has the higher EMV, it is usually the stronger choice on financial grounds alone. However, a good business manager may still reject it if the data are unreliable or the risk of a bad outcome is too severe.

Quick check

1. Which is the best evaluation point?

2. Why might a manager reject the highest-EMV option?

Worked example – drag and drop

Sinapple is deciding whether to open a new store or expand its website. Drag the missing probabilities, values and EMVs into the correct places.

3 guided practice

Opening a new store has a 70% chance of success leading to £420,000 profit, but a 30% chance of failure leading to a £24,000 loss. Expanding the website has a 60% chance of success leading to £480,000 profit, but a 40% chance of failure leading to a £32,000 loss.

Complete the decision tree

Decision point

Should Sinapple choose option A or B?

Options

Open new store

physical expansion

Expand website

online expansion

Probabilities

Drop probability

Monetary values

Drop value

EMVs

Drop EMV

0.7

0.3

0.6

0.4

£420,000

−£24,000

£480,000

−£32,000

£286,800

£275,200

EMV for opening a new store

£286,800

EMV for expanding the website

£275,200

Financial recommendation

Open the new store

Interpretation: the decision tree suggests that opening the new store is the better option based purely on expected financial outcomes, because its EMV is higher than website expansion.

Practice 1 – Sinapple Studios

Students should calculate the missing values, compare the EMVs and recommend the best option.

4 full practice

Sinapple Studios is deciding between two promotional strategies for a new healthy snack brand: launching pop-up kiosks in malls or building a subscription app. The pop-up kiosks have a 0.65 chance of success generating £360,000 and a 0.35 chance of failure causing a £40,000 loss. The subscription app has a 0.50 chance of success generating £500,000 and a 0.50 chance of failure causing a £90,000 loss.

Fill in the tree from the scenario

Decision point

Which launch strategy should be chosen?

Options

Pop-up kiosks

physical retail launch

Subscription app

digital subscription model

Probabilities

Pop-up success probability

Pop-up failure probability

App success probability

App failure probability

Monetary values

Pop-up success value (£)

Pop-up failure value (£)

App success value (£)

App failure value (£)

EMV

EMV for pop-up kiosks (£)

EMV for subscription app (£)

Decision

Interpretation

The subscription app should be chosen because its possible success value is larger, even though its EMV is lower. Pop-up kiosks should be chosen because they have the higher EMV, so they are the stronger option on expected financial return. Both options are equally good because both have one success outcome and one failure outcome.

Limitation / evaluation

The decision tree gives exact certainty, so the manager no longer needs judgement. The manager should still be cautious because probabilities are estimates and non-financial factors may matter too. Decision trees can only be used for very small businesses, so this analysis is invalid.

Practice 2 – UrbanBite

Another full decision-tree scenario with a different risk profile.

5 full practice

UrbanBite is choosing between opening a flagship city-centre restaurant or starting a delivery-only kitchen. The flagship restaurant has a 0.55 chance of success generating £650,000 and a 0.45 chance of failure causing a £180,000 loss. The delivery-only kitchen has a 0.75 chance of success generating £320,000 and a 0.25 chance of failure causing a £40,000 loss.

Complete the decision tree

Decision point

Which market-entry option should UrbanBite choose?

Options

Flagship restaurant

premium dine-in model

Delivery-only kitchen

lower-cost digital model

Probabilities

Flagship success probability

Flagship failure probability

Kitchen success probability

Kitchen failure probability

Monetary values

Flagship success value (£)

Flagship failure value (£)

Kitchen success value (£)

Kitchen failure value (£)

EMV

EMV for flagship (£)

EMV for delivery kitchen (£)

Decision

Interpretation

The delivery-only kitchen should be chosen because it has a lower possible loss, even though its EMV is lower. The flagship restaurant should be chosen because it has the higher EMV and is therefore financially preferable on expected return. The two choices cannot be compared because they involve different business models.

Limitation / evaluation

Managers should still consider risk and whether the probability estimates are reliable before deciding. The higher EMV proves the flagship will definitely succeed in real life. Decision trees automatically include all branding and reputation effects, so no evaluation is needed.

Practice 3 – PeakWear

One more scenario, with close attention to interpretation and judgement.

6 full practice

PeakWear is launching an outdoor clothing range. Management must choose between opening a branded retail store or partnering with an established online marketplace. The retail store has a 0.48 chance of success generating £900,000 and a 0.52 chance of failure causing a £260,000 loss. The online marketplace has a 0.80 chance of success generating £300,000 and a 0.20 chance of failure causing a £35,000 loss.

Build the final decision tree

Decision point

Which launch route should PeakWear choose?

Options

Retail store

high-return / high-risk

Marketplace partner

lower-return / lower-risk

Probabilities

Store success probability

Store failure probability

Marketplace success probability

Marketplace failure probability

Monetary values

Store success value (£)

Store failure value (£)

Marketplace success value (£)

Marketplace failure value (£)

EMV

EMV for retail store (£)

EMV for marketplace (£)

Decision

Interpretation

The marketplace partner should be chosen because it has the higher probability of success, even though its EMV is lower. The retail store has the higher EMV, so it is the financially preferred option if PeakWear focuses on expected monetary return. EMV does not matter when a business is launching a new product range.

Limitation / evaluation

The higher EMV should always be chosen automatically, with no need for further judgement. Managers may still prefer the marketplace route if they are more risk-averse or doubt the estimates behind the decision tree. Decision trees are only useful when all outcomes are guaranteed.

Flashcard studio

Click the card to flip it. Use the jump list to move between terms.

7 retrieval

Topic

Term

Tap / click to reveal the definition.

Topic

Definition

Definition goes here.

End-of-topic quiz

Choose an answer and it will be checked instantly.

8 quiz

Question 1 of 10

Score: 0 / 10

Select, get feedback, then move on.