Decision tree analysis – Expected Monetary ValueThese are some of the techniques used when carrying out the process to perform a quantitative risk analysis and is used as the first step in determining the uncertainties within the project in all of them to get better information upon which to make a judgment. Show
This technique will normally occur by using subject matter experts all people with experience with this type of project. The focus here will be on determining those risks that may impact upon schedule or cost of the project. The Decision Tree analysis will enable you to make better decisions, and to determine the most appropriate actions for both risk threats and opportunities – and hence assist in the Plan Risk Responses process. Expected monetary value (EMV) within the decision treeThe decision tree technique is there to establish a costs order point based on various risk scenarios, so the decision tree needs to be drawn up correctly and logically. The best way to do this is to arrange a meeting or workshop so that the various risk scenarios can be brainstormed and the probability of the scenario estimated. From the list, the monetary value must be determined that is associated with each outcome by multiplying the risk probability times the monetary value of each outcome. The monetary value of the Decision Tree risk outcomes can now be added to get the expected monetary value of the risk of decision. This is best understood by using a simple example:
Decision TreeLaying out this scenario as a Decision Tree with the various outcomes might look like this: So once you have the Decision Tree drawn, it is fairly straightforward to calculate the numbers. Take the assumption of the furniture being available for purchase, this is 50% likely to happen and if it did it would cost $45,000. So the math is just 0.5 times $45,000 = $22,500. Summing the EMV for the refurbish condo option gives $57,000, and similarly for the move to Italy, gives $63,000. Doing this for each of the outcomes will give you: So this suggests a lower risk cost for refurbishing. Notice that the selling and buying of the properties have not been factored in here for simplicity. In the real world, this would need to have other factors added, such as the cost of selling and buying, the likely market situation to do that, the time frames involved and so on. However, this example is typical of a PMP exam question. Want to learn more about Decisions Trees and lots more – plus prepare for your PMP Exam?https://www.projex.com/courses/pmp-masterclass/ Is EMV used in decision making under uncertainty?Benefits of EMV Analysis
It gives you an average outcome of all identified uncertain events. It helps you to calculate the contingency reserve. In a decision tree analysis, it helps select the best choice.
What is the expected value of a decision alternative?The expected value of a decision alternative is the sum of weighted payoffs for the decision. The weight for a payoff is the probability of the associated state of nature and therefore the probability that the payoff occurs.
Which of following decision criterion would be used by an optimistic decision maker solving a problem under conditions of uncertainty?The Maximax criterion is an optimistic approach. It suggests that the decision maker examine the maximum payoffs of alternatives and choose the alternative whose outcome is the best.
What is the expected value of perfect information EVPI equal to quizlet?The expected value of perfect information (EVPI) is the increase in the expected profit that would result if one knew with certainty which state of nature would occur.
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