Decision Tree Analysis - Key Concepts in Project Management

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Last updated on
25th Jul, 2022
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23rd Jun, 2022
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Decision Tree Analysis - Key Concepts in Project Management

While working as a project management professional, you often come across situations where you have to make important decisions for projects with various levels of complexity. There are times when there are several choices, and you will be required to evaluate the outcomes related to each choice and accordingly make decisions that are best for your career and the company as a whole. In such situations, decision tree diagram analysis serves as a perfect tool to come up with efficient solutions.

You can enrol in one of the leading project management professional certifications (PMP) to gain practical knowledge. 

Before getting into the this topic, let us first understand decision making process

What is the Concept of Decision Tree Analysis?

A decision tree diagram is a flowchart that features the visual distinction of potential outcomes, costs, and consequences of related choices. In this form of diagram, the flowchart initiates with one major base idea, and then various branches are projected based on the consequences of your decisions.

The decision tree flowchart evaluates the chance of success, risks, and benefits for every branch of consequence. Based on each decision and outcome, you can calculate the expected value of the outcome, and by comparing each outcome, you can choose the best course of action.

The 'tree-like' appearance of the model gives it the name decision tree diagram analysis. This structure has four basic elements which contribute to the clarity and precision of the decision tree analysis. They are 

1. Alternative Branches 

Branches are the lines that branch out from a decision. These portray the viable outcomes or decisions and connect the nodes.

2. Decision Nodes

The square symbols on the decision tree are the decision nodes, and these represent the choice or decision that would serve as an effective solution for the project.

3. Chance Nodes 

Represented by circular symbols, chance nodes are the multiple possible outcomes. These nodes are used in the cases where the outcomes are uncertain. 

4. End Nodes 

Found at the end of the diagram, the end nodes feature the outcome. Triangular symbols show these nodes. 

Decision Tree Analysis and Expected Monetary Value

The amount of monetary gain you can expect from a particular decision is called the expected monetary value of the decision. It is a statistical technique that helps the project manager determine the contingency reserves by converting risks into estimated numerical values. The calculation of EMV PMP is explained in detail in the project management certification courses.

With the decision tree project management analysis, you can calculate the values of several outcomes and gauge their possibilities. EMV can be calculated by multiplying both possible outcomes by the possibility of the occurrence of each outcome and then adding the obtained values. Then you have to subtract any available initial cost from the total value.

How to Use a Decision Tree Analysis in Project Management?

Decision trees play an important role in project management. It helps in effectively managing decisions and improving project management. Given below is a step-by-step procedure for utilisation of a decision tree chart in a project: 

  • In a situation where the project managers face problems while coming to a certain decision, they must start by identifying all possible options. Based on the type and objective of the project, every project has its road to success, and every decision can seriously impact it.
  • Once the project stakeholders manage to identify the decisions, they have to evaluate each decision's possible outcomes and results by using prediction and estimation tools.
  • After evaluating potential outcomes, each outcome undergoes a detailed study and analysis, where the risks and benefits involved with each outcome are thoroughly assessed. 
  • As per the assessed results, the project managing professionals can efficiently manage to pick the best possible decision for the particular project. 

Decision Tree Analysis Steps

The decision tree flowchart analysis can be used by following a set of four simple steps mentioned below: 

  • Identify Every Possible Decision 

The first step is to recognize all the possible and available options. There are several paths for any project or problem via which you can achieve the result. Your first task is to recognize all those options and jot them down in the decision tree PMP.

  • Evaluate Possible Outcomes for Each Decision

Once you have organised all potential options, you have to pick every option and evaluate every possible outcome or result you might come across if you choose the particular option. Not all your evaluations need to be accurate. Here you have to rely on estimates, guesses, and predictions as per the analysis. This step aims to realise which option or choice has the highest chance of success.

  • Perform a Thorough Analysis of Each Outcome:

By the time you reach this stage, you must have a complete decision tree diagram with you. Now comes the part where you have to thoroughly analyse every potential outcome and the risks and benefits that come with the given outcome. If the particular project or problem includes monetary amounts, you can calculate the EMV (Expected Monetary Value) of each outcome to help you further in making a more qualified decision. 

Accordingly, Optimise Your Actions And Decisions:

Once you have completed the third step, you will now have a much clearer idea as to which option serves the project best and offers the highest value. As per the observations and calculations, you can finally choose the most profitable option for the given assignment.

With the help of KnowledgeHut’s project management professional certification, you can learn how to efficiently create a decision tree diagram and proficiently use it for the benefit of your company as a whole. 

Decision Tree Analysis Example

The phenomenon can be better understood with a decision tree analysis in the project management example.

The following example explains construction project management. Here, the contractor first assesses the options available regarding the outsourcing of the construction materials. Here he has two options. He can either outsource from an India-based seller or an overseas seller. As per each option, there are two potential outcomes. While the Indian-based seller would allow the contractor to personally inspect, it is costlier. On the other hand, the overseas seller might be cheaper, but the travel expenses won’t allow inspection of materials.

While evaluating the results by using EMV formula pmp, the score for India-based sellers is 80,000 with an 80 percent chance of success. When the EMV of the overseas seller is calculated, with merely a 50 percent chance of success, the loss EMV is 15000. By analyzing both situations, the more viable decision is to go with the Indian seller.

Tools Required for Decision Tree Analysis

Given below is the list of some physical tools which can help you evaluate your different options: 

  • Pen And Paper 

The pen and paper are the basic equipment required while making a decision tree diagram. It is a cost-effective and practical tool that can come in handy at any moment.

  • Whiteboard 

If you wish to step up from the old-school pen and paper, you can use a whiteboard. This tool is more efficient than pen and paper because the mistakes can easily be fixed on the whiteboard by using the eraser. The whole process and diagram are thus cleaner and clearer than the first option.

  • Sticky Notes 

Sticky notes are a great tool that can emphasise a particular aspect or make it stand out and draw attention. If there is something short and extra that you wish to add, you can very well do it by using a sticky note.

  • Markers 

Markers or whiteboard pens of different colours will serve a great deal in helping you differentiate between different decisions or outcomes. Adding colour to the diagram always adds clarity and visual stimulation.

  • Decision Tree Software 

If you wish to draw a decision tree online or digitally, several decision-tree software is at your disposal. They have a system of creating neat and clear diagrams that can also be shared with colleagues. Plus, it will take up no room at your office.

Pros And Cons of Decision Tree Analysis 

Pros 

Cons 

Offer a clear and reliable method for you to choose the best possible option. 

Has the possibility of becoming complex if you stuff in too many decisions or ideas.

Clear representations make your work easier and more efficient.

If the data keeps changing, the whole tree system might become unstable. 

The method is adaptable and can easily accommodate new ideas or outcomes if needed.

If you don’t perform a thorough analysis of the potential outcomes, the result might be risky.

Sectors Where Decision Tree Can Be Used

Decision tree analysis can assist decision-making in several areas, including budget planning, operations management, project management, and expansion decisions of the company. It is a cost-effective, efficient, and transparent method that can help you make the most profitable decision wherever there is a possibility of several similar options to a particular project.

Also, check out the details on how to become a project manager here. 

Bottom Line 

A Decision tree is a statistical concept using a value management approach that offers a simplified and accurate way of identifying and analysing uncertain situations and choosing the best potential option. With the help of decision tree analysis in project management, you can easily analyse several outcomes simultaneously and make the best and most knowledgeable decision.

Frequently Asked Questions

1. What is a decision tree in PMP and its steps?

A decision tree in project management enables professionals to identify and analyse several decisions and their outcomes to attain the most profitable solution. Its steps include: 

  • Identifying every possible option. 
  • Evaluating potential outcomes of each option. 
  • Analysing each outcome. 
  • Choosing the best option.

2.  What are the pros of decision trees?

The pros of the decision tree are given below: 

  • Transparency 
  • Adaptability 
  • Efficient 

3.  How do you avoid overfitting in PMP decision trees?

Overfitting in PMP decision-making can be avoided using two approaches: pre-pruning and post-pruning.

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Preethiga Narasimman

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Due to her interest in Search Engine Optimization, she started her career as an SEO Intern and have contributed to the healthy digital presence for multiple brands with her mastery over web and YT search algorithms. In her free time, she plays with her Persian cat, and she loves fishkeeping. She is also good at making craftworks, painting, and cooking.