What is a Tree Diagram?

A tree diagram is a tool (especially a graphical representation) which is utilized in strategic decision making, market valuation, and for calculating probability. This diagram starts at a single point, with branches moving to create extra points. Most tree diagrams starts from one point, with their branches moving to create two or three points at most, and each new point also has branches which creates other points. Tree diagrams are mostly used to represent two events that cannot occur at the same time (e.g. night and day, death and life).

How is a Tree Diagram Used?

Using tree diagrams, users will have the right to represent two events that cannot occur together starting from a single point. An example would be the sentence: night and day cannot occur at the same time on earth. Here, the earth will be the single point, and the two branches which creates two new points will be night and day. Points are assigned value for simplicity. Users also have the ability to assign values to points that might occur (known as chance nodes). Decision node are two-options question, i.e. yes or no. Tree diagrams use decisions, probability and cost (sometimes associated with a point) to provide strategic answers. Traders and investors can easily make use of the tree diagram model for determining the price of a decision, say buy or sell, at any given price of the portfolio at a particular time.