Decision Trees: A Common PMP Risk Analysis Tool

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Decision Trees: A Common PMP Risk Analysis Tool

Like This Blog 0 Steve Fullmer
Added by February 22, 2013

With the release of the Project Management Body of Knowledge (5th Edition), several knowledge areas are expanding.  PMBOK (4th Edition) expanded the Risk Management Knowledge area by acknowledging the value of both insurable and business related risk.  Business related risk introduces the probability of enhanced value due to opportunistic risk outcomes.  Within the arena of business administration, practitioners regularly conduct a S.W.O.T analysis.  Strength – Weakness – Opportunity –Threat.  Strength and Weakness are internally sourced, while Opportunity and Threat occur due to external sources.  Historically, managers mis-perceive that it is easier to avoid or mitigate negative risk than it is to enhance or exploit opportunistic risk.   With a simple understanding of risk tools, it is quite simple to assess both positive and negative risk.   PMBOK (5th edition), and the growing popularity of the PMI-RMP credential, are expanding emphasis on risk management tools.

One of the most powerful tools for determining net outcomes from both positive and negative risk events is the decision tree.  For any set of outcomes, the total probability is 100% or 1.0.  If you can determine the probability for a subset of the possible outcomes, all alternate outcomes must complete 100% of the outcomes.  For instance, if you can determine that outcome A will happen 40% of the time, and outcome B will happen 20% of the time, then all other outcomes must occur 40% of the time in aggregate.

40% + 20% = 60%   and 100% – 60% = 40%.

A simple way to visualize the alternatives is a decision tree.

Decision Tree A common PMP Risk Analysis tool

To determine the total impact, use the Expected Monetary Value for each branch of the decision tree.  Expected Monetary Value is probability times impact.  EMV = P * I.

Probability is just the percent likellhood that the event will occur.  Impact is the monetary loss or gain should the event occur.  Calculate the EMV for each branch, and add the results.  It quickly becomes obvious whether the aggregate outcome, without influencing the results, will be positive or negative.  Then an effective project manager can determine whether better results might be achieved by applying resources to reduce negative outcomes or increase positive outcomes.

The creation of a decision tree is not a difficult task.  My students regularly ask for tools that might be used to create simple decision tree models.

Given just a little research, I was able to find several tools and websites with free or low cost models that might help both beginning project managers and more experienced risk managers to develop their decision tree skills.

Decisions Trees by Mindtools

An article with pointers to MindTools apps

Web Based interactive Decision Tree tool

TreeAge Tools

DTReg – Decisions

SmartDraw

Methods for Statistical Analysis

If you find additional decision tree tools with a low price tag or straight forward instructions, I would love to hear about them so that we can share them with future students.

Have an opportunistic year!

Enjoy!
Steven Fullmer
Interface Technical Training Staff Instructor

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