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Decision Tree Analysis
What is decision tree analysis? Decision trees are used to support selection of the best of several alternative courses of action.
We might have a few different ways that we could go in a project, and we actually need to start analyzing that and which one is the best and which one is not the best, and to do that we look at alternative paths through the project which are shown in the decision tree using these branches, representing different decisions or events.
Each of these branches can have associated costs and related individual project risks assigned to them as well. Those risks could be both positive or negative as we know – we’ve got threats and opportunities.
Decision Tree Example Analysis
Here is an example of what that looks like. We’ve got the different branches of the tree and each one has a cost associated with it, and also the probability and impact of the risks associated with that decision path. That is a really handy thing to know, and we need to know what happens if something goes wrong – what’s the cost of that? And also what’s the cost to take that path?
The endpoints of the branches in the decision tree represent the outcome from following that particular path which, can be negative or positive, and the decision tree is evaluated by calculating the expected monetary value of each branch – which is quantitative analysis. So that’s where our qualitative and quantitative differences come into play. Quantitative analysis is the cost or the monetary value, and we want to know what that cost is going to be so we can follow the optimal path, avoiding additional costs where we can and making sure that we’re keeping our costs down while still providing that business value of the project.
And that is decision tree analysis.
– David McLachlan