Decision tree

Abstract Decision Tree as a tool in Risk Management.

When the risks have been identified and the respective impacts and probabilities have been investigated, the decision whether to insure, mitigate, accept or externalise the risk in question will result in different possible outcomes with different probabilities and consequences. From these different branches other risk decisions will be made, and in the end a decision tree with all the possible different paths to what risks will be managed and how, will be established.

This wiki article investigates how the decision tree works as a tool in risk management, what the benefits are and what barriers are related to this tool.

1. The Decision Tree Concept

2. Applying the Decision Tree to Project Management

3. Other Risk Management Tools Involved

4. Benefits and Possibilites

5. Limitations and Barriers

6. Conclusion

7. References

8. Annotated Bibliography

Writer: Frederik Lind, s133570

Initial Steps to Decision Making

Risk Identification

The identification of risks is a process that must begin early in the project.

While it is downright impossible to identify all risks before they occur, it is however possible to map an extensive majority through a combination of a number of identification methods. Consider Both Threats and Opportunities

Risk Assessment

Define Consequence and Likelihood Ranges

Figure 1. The probability/impact matrix.

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Risk Response Analysis

"'Having identified and analysed the implications of the risk sources, the next task is to decide what to do about each of them as shown in Fig. 13.2. In broad terms, the options are as follows.

Accept the risk and plan to respond to the risk event – see section 13.5.4. ● Externalise the risk down the supply chain by subcontracting, as discussed in section 7.6.This should only be done when the agent is in a better position to manage the risk than the principal, because of having either more information or greater managerial capability. Externalising risk to an agent which does not have greater capabilities is folly and generates the secondary risk of the agent failing to meet commitments, and thereby effectively handing the risk back to the principal.The extreme case here is when the agent is bankrupted by the occurrence of the risk event. ● Mitigate the risk by changing the project mission or scope so as to minimise the probability of the risk event occurring.This is frequently the most appropriate response to identified risk sources, and a very good example of why risk man- agement needs to start very early in the project life cycle. ● Insure or hedge against the risk where this is possible.With low-probability rare catastrophes beyond the control of the actors – such as a fire – insurance is usually possible. Where the risks are purely financial and spread across a large number of decisions, portfolio management techniques such as taking options to hedge losses are appropriate. ● Delay the decision until more information is available.This is frequently used, particularly in relation to risks generated by the regulatory system.

The Decision Tree Concept

Figure 2. Decision/event tree for prior and posterior decision analysis.

Figure 3. Decision/event tree for pre-posterior decision analysis.