What is the first step in a decision-tree analysis?

• A. Specify decision context
• B. Develop a decision model with options, consequences, desirability, likelihood of event
• C. Represent the decision model in tree format
• D. Perform sensitivity analysis

Answer: (A)

Specifying the decision context is the first step. This means clearly stating what decision is being made, what the objective is, who is involved, the available alternatives, any constraints or time horizon, and how success will be judged (the preferences or utilities that matter). Framing the problem this way sets the boundaries for the entire analysis and determines which outcomes, data, and probabilities are relevant. Once the context is defined, you can develop the decision model with the options, their consequences, how desirable each outcome is, and the likelihoods of those outcomes. Then you translate that model into a tree structure and finally test how changes in the inputs might alter the recommended choice through sensitivity analysis. Without a clear context, the tree can miss important options or misrepresent the real constraints and values at stake, leading to a misleading analysis.