DECISION TREE

ANALYSIS

SUBMITTED BY : SUBMITTED TO:

KASHIKA BATRA MR.NAVKIRAN

21019
A decision tree is a diagram or chart that people use to determine a course of action
or show a statistical probability. It forms the outline of the namesake woody plant,
usually upright but sometimes lying on its side. Each branch of the decision tree
represents a possible decision, outcome, or reaction. The farthest branches on the
tree represent the end results.

A decision tree is a type of diagram that clearly defines potential outcomes for a
collection of related choices. In project management, a decision tree analysis exercise
will allow project leaders to easily compare different courses of action against each other
and evaluate the risks, probabilities of success, and potential benefits associated with
each.

Individuals use decision trees to clarify and find an answer to a complex problem.
Decision trees are frequently employed in determining a course of action in
finance, investing, or business.

By displaying a sequence of steps, decision trees give people an effective and easy
way to visualize and understand the potential options of a decision and its range of
possible outcomes. The decision tree also helps people identify every potential
option and weigh each course of action against the risks and rewards each option
can yield.

An organization may deploy decision trees as a kind of decision support system.

The structured model allows the reader of the chart to see how and why one choice
may lead to the next, with the use of the branches indicating mutually exclusive
options. The structure allows users to take a problem with multiple possible
solutions and to display those solutions in a simple, easy-to-understand format that
also shows the relationship between different events or decisions.

In the decision tree, each end result has an assigned risk and reward weight or
number. If a person uses a decision tree to make a decision, they look at each final
outcome and assess the benefits and drawbacks. The tree itself can span as long or
as short as needed in order to come to a proper conclusion.

To make a decision tree, you must start with a specific decision that needs to be
made. You can draw a small square at the far left of the eventual tree to represent
the initial decision. Then you draw lines outward from the box; each line moves
from left to right, and each represents a potential option. Or you can start with a
square at the top of a page or screen, and draw the lines downward.
At the end of each line, or option, you analyze the results. If the result of an option
is a new decision, draw a box at the end of that line, and then draw new lines out of
that decision, representing the new options, and labeling them accordingly. If the
result of an option is unclear, draw a circle at the end of the line, which
denotes potential risk. If an option results in a decision, leave that line blank. You
continue to expand until every line reaches an endpoint, meaning you've covered
every choice or outcome. Draw a triangle to indicate the endpoint.
Business or project decisions vary with situations, which in-turn are fraught with
threats and opportunities. Calculating the Expected Monetary Value of each
possible decision path is a way to quantify each decision in monetary terms.
Calculating Expected Monetary Value by using Decision Trees is a recommended
Tool and Technique for Quantitative Risk Analysis. For the PMP exam, you need
to know how to use Decision Tree Analysis to make decisions in Project Risk
Management.

Steps to Use Decision Trees Analysis

To use Decision Tree Analysis in Project Risk Management you need to:

1. Document a decision in a decision tree.

2. Assign a probability of occurrence for the risk pertaining to that decision.
3. Assign monetary value of the impact of the risk when it occurs.
4. Compute the Expected Monetary Value for each decision path.

To understand how to calculate Expected Monetary Value for simple situations

certain steps are to be followed:

● Assign a probability of occurrence for the risk.

● Assign monetary value of the impact of the risk when it occurs.
● Multiply Step 1 and Step 2.

The value you get after performing Step 3 is the Expected Monetary Value. This
value is positive for opportunities (positive risks) and negative for threats (negative
risks).
The simplest way to understand decision trees is by looking at a Decision Trees
example in Project Risk Management.

Decision Trees Example – Scenario

Suppose your organization is using a legacy software. Some influential

stakeholders believe that by upgrading this software your organization can save
millions, while others feel that staying with the legacy software is the safest option,
even though it is not meeting the current company needs. The stakeholders
supporting the upgrade of the software are further split into two factions: those that
support buying the new software and those that support building the new software
in-house. Confusion reigns in the meeting room with stakeholders pointing
out negative risks for each option.

By exploring all possibilities and consequences, you can quantify the decisions and
convince stakeholders. This is known as Decision Tree Analysis. The following
Decision Trees example uses Decision Tree Analysis to help make an informed
Project Risk Management decision. The computations involve calculating the
Expected Monetary Value.