Back to Decision Modeling and Analysis

Decision Tree Analysis

5 minutes 5 Questions

Decision Tree Analysis is a graphical representation of possible solutions to a decision based on certain conditions. It's an effective tool for weighing the risks and benefits of various options by mapping out each possible outcome in a tree-like diagram, which displays branches for every potential decision path. In the context of a PMI Professional in Business Analysis course, Decision Tree Analysis helps professionals assess the impact of different decisions in complex projects where uncertainty and multiple possible outcomes are common. By using Decision Trees, business analysts can systematically evaluate potential outcomes, probabilities, and the costs or benefits associated with each decision path. This method allows for clear visualization of sequential decisions and chance events, making it easier to compare the expected values of different courses of action. Decision Trees are particularly useful when dealing with decisions that involve significant uncertainty or when quantifiable data is available to estimate probabilities and outcomes. For example, in project management, a decision might involve choosing between two different technologies, each with its own costs, benefits, and risks. A Decision Tree can help map out the possible future events, such as the success or failure of each technology, associated costs, and probabilities, enabling informed decision-making. Moreover, Decision Tree Analysis supports the identification of the most beneficial path by calculating the Expected Monetary Value (EMV) of each possible outcome. This quantitative approach ensures that decisions are not just based on intuition but are reinforced with statistical data. It also aids in identifying and mitigating risks by highlighting the potential negative outcomes and their impact on the overall project. In summary, Decision Tree Analysis is a valuable concept in decision modeling and analysis for business analysts. It combines probability, financial quantification, and graphical representation to aid in making informed, data-driven decisions in the face of uncertainty. Understanding this concept enables professionals to break down complex decisions into manageable parts, assess the implications of each choice, and select the option that provides the greatest overall benefit to the organization.

Decision Tree Analysis: A Comprehensive Guide for PMI-PBA

Why Decision Tree Analysis is Important

Decision Tree Analysis is a critical tool in business analysis because it:

• Provides a structured approach to decision making under uncertainty
• Visualizes alternative courses of action and their potential consequences
• Quantifies the probability and impact of different outcomes
• Helps stakeholders understand complex decision scenarios
• Supports more objective, data-driven decisions rather than relying solely on intuition
• Aligns with PMI-PBA's emphasis on analytical techniques for solution evaluation

What is Decision Tree Analysis?

Decision Tree Analysis is a graphical decision support tool that uses a tree-like model of decisions and their possible consequences. It's a way to display an algorithm that only contains conditional control statements.

Key components include:

• Decision nodes (typically squares): Points where a decision needs to be made
• Chance nodes (typically circles): Points where random outcomes occur with assigned probabilities
• End nodes (typically triangles): Final outcomes with assigned values (typically monetary)
• Branches: Connecting lines showing the flow from one node to another
• Probabilities: Likelihood of outcomes at chance nodes (must sum to 1 or 100%)
• Expected Monetary Value (EMV): Calculated value based on outcome values and probabilities

How Decision Tree Analysis Works

1. Identify the decision problem: Clearly define what decision needs to be made

2. Draw the decision tree structure:
• Start with a decision node
• Add branches for each possible decision option
• For each option, add chance nodes for uncertain events
• Add branches from chance nodes with probability values
• Complete with end nodes showing outcomes

3. Assign probabilities and values:
• Determine the probability of each uncertain outcome
• Assign monetary values (costs or benefits) to each final outcome

4. Calculate Expected Monetary Value (EMV):
• Work backward from the end nodes
• At chance nodes: EMV = Sum of (Probability × Value) for each branch
• At decision nodes: Choose the option with the best EMV

5. Make the optimal decision based on the highest expected value

Example:

A business needs to decide whether to launch a new product or expand an existing one:

• Launch new product:
- 40% chance of high market acceptance: $200,000 profit
- 60% chance of low market acceptance: $50,000 profit
- EMV = (0.4 × $200,000) + (0.6 × $50,000) = $80,000 + $30,000 = $110,000

• Expand existing product:
- 70% chance of moderate increase: $120,000 profit
- 30% chance of minimal increase: $60,000 profit
- EMV = (0.7 × $120,000) + (0.3 × $60,000) = $84,000 + $18,000 = $102,000

Based on higher EMV, launching the new product ($110,000) is the optimal decision over expanding the existing product ($102,000).

Exam Tips: Answering Questions on Decision Tree Analysis

1. Understand the terminology:
• Know the symbols for different nodes (decision, chance, end)
• Be familiar with terms like EMV, probability, and utility

2. Practice calculations:
• Be comfortable calculating EMV
• Remember that probabilities at each chance node must sum to 1 (100%)
• Pay attention to whether values represent costs (negative) or benefits (positive)

3. Follow a systematic approach:
• Always work backwards from end nodes when calculating EMV
• At decision nodes, select the branch with the best outcome (usually highest value)

4. Look for context clues:
• Consider risk tolerance in the scenario
• Note any non-monetary factors that might influence the decision

5. Common question types:
• Calculating the EMV of different options
• Identifying the optimal decision path
• Analyzing how changes in probabilities affect decisions
• Determining the value of perfect information

6. Watch for complexity:
• Multi-stage decision problems with several layers
• Problems that incorporate sunk costs
• Scenarios with risk-adjusted values

7. Time management:
• Draw the tree clearly but quickly to organize your thinking
• Double-check your EMV calculations
• For complex trees, consider solving only parts that answer the specific question

Remember that on the PMI-PBA exam, decision tree questions assess your ability to structure decisions logically and use probability-weighted outcomes to make optimal choices.

Test mode:
Start practice test
PMI-PBA - Decision Modeling and Analysis Example Questions

Test your knowledge of Amazon Simple Storage Service (S3)

Question 1

In Decision Tree Analysis, what statistical measure best represents the variance between consecutive branch probability outcomes?

Correct Answer: Mean Absolute Node Deviation (MAND)

Mean Absolute Node Deviation (MAND) is the most appropriate statistical measure for representing variance between consecutive branch probability outcomes in Decision Tree Analysis. This measure is specifically designed to calculate the average deviation between probability values at different node points in a decision tree, making it ideal for analyzing sequential probability variations. The other options are either nonexistent or inappropriate measures: Expanded Cumulative Branch Variance Distribution (ECBVD) is not a real statistical measure used in decision tree analysis. Sequential Probability Deviation Coefficient (SPDC) sounds plausible but is a fictitious term that does not exist in standard decision tree methodology. Nodal Statistical Regression Analysis (NSRA) relates to regression analysis, which is a different statistical concept not specifically used for measuring branch probability variances in decision trees.

Question 2

In a Decision Tree Analysis, what is the primary purpose of calculating Expected Monetary Value (EMV) at decision nodes?

Correct Answer: To determine the optimal path by comparing potential financial outcomes of different choices

In Decision Tree Analysis, EMV at decision nodes serves to identify the most financially advantageous path among available options. The primary purpose is to compare and evaluate different choices based on their potential financial outcomes. The correct answer accurately captures this concept, as EMV helps decision-makers select the optimal path by quantitatively comparing the monetary outcomes of different choices, weighted by their probabilities. The other options are incorrect because: - Estimating total project budget is not the main purpose of EMV calculations; it's about comparing choices - While probabilities are used in EMV calculations, multiplying by resource allocation is not the focus - Risk exposure evaluation is a byproduct but not the primary purpose of EMV calculations EMV specifically helps in making informed decisions by providing a quantitative basis for comparing different paths in the decision tree, allowing decision-makers to select the most valuable option based on probability-weighted outcomes.

Question 3

What feature of a Decision Tree Analysis helps in identifying potential deviation points and analyzing alternative paths in a project?

Correct Answer: Branch points represent decision nodes where specific courses of action can be evaluated

Decision Tree Analysis uses branch points as decision nodes where different courses of action can be evaluated, which is the fundamental characteristic that makes it valuable for project analysis. A decision tree's branch points serve as crucial junctures where stakeholders can analyze different options and their potential outcomes, making it an essential tool for decision-making and scenario planning. The other options are incorrect because: - Branch points are not mandatory sequential steps - they represent choices and alternatives rather than required sequences - While risk may be considered at branch points, they are not primarily for probability calculations - Branch points in decision trees are not related to critical path method calculations, which is a different project management technique entirely Decision nodes (branch points) allow teams to map out various possibilities and evaluate different paths, making them essential for strategic planning and decision-making in business analysis.

Go Premium

PMI Professional in Business Analysis Preparation Package (2025)

  • 3015 Superior-grade PMI Professional in Business Analysis practice questions.
  • Accelerated Mastery: Deep dive into critical topics to fast-track your mastery.
  • Unlock Effortless PMI-PBA preparation: 5 full exams.
  • 100% Satisfaction Guaranteed: Full refund with no questions if unsatisfied.
  • Bonus: If you upgrade now you get upgraded access to all courses
  • Risk-Free Decision: Start with a 7-day free trial - get premium features at no cost!
More Decision Tree Analysis questions
48 questions (total)
Start 48 question test