13.8 Event tree diagrams

Question 1

What is an event tree diagram?

Answer 1

A common tool for risk mapping - all possible outcomes of an event at represented on a tree diagram, connected according to their inter-dependability.

Question 2

What are the steps followed to produce a tree diagram?

Answer 2

1 A project is identified (e.g. a product launch)
2 Sequential events relating to specific scenarios are identified
3 Probabilities for each event are determined
4 The expected net present value (ENPV) for each is calculated
5 The sum of all ENPVs is given

Question 3

What are the limitations of event tree diagrams?

Answer 3

• it is not normally realistic to identify all the various possible outcomes
• probabilities are difficult to calculate
• event tree diagrams require a trained analyst
• all events are assumed to be independent, but this is not always realistic
• analysis is limited to a specific initiating event. Multiple trees would be required for variations on that initiating event