Decision Tree Analysis

Unfortunately, this isn't a tree outside your office door that produces "yes" and "no" leaves that you can pick to help you make a decision. Decision trees are diagrams that show the sequence of interrelated decisions and the expected results of choosing one alternative over the other. Typically, more than one choice or option is available when you're faced with a decision or, in this case, potential outcomes from a risk event. The available choices are depicted in tree form starting at the left with the risk decision branching out to the right with possible outcomes. Decision trees are usually used for risk events associated with time or cost.

Figure 6.6 shows a sample decision tree using expected monetary value (EMV) as one of its inputs.

FiGuRE 6.6 Decision tree

Expected Value of Decision

The expected monetary value of the decision is a result of the probability of the risk event multiplied by the impact for two or more potential outcomes and then summing their results. The squares in this figure represent decisions to be made, and the circles represent the points where risk events might occur.

The decision with an expected value of $7,000 is the correct decision to make because the resulting outcome has the greatest value.

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