When to use it
Use it when an early choice changes what happens or what can be decided later.
Do not average decision branches as if they were random outcomes or reuse unconditional probabilities at every node.
Apply it
Probabilities at each chance node sum to one. Do not apply unconditional probabilities to conditional branches or count a cost twice.
- Draw your own sequence of decisions and chance events.
- Attach conditional probabilities and consistent net payoffs.
- Work backwards: average chance outcomes and compare available decisions.
An example in practice
A small pilot can reveal integration problems before a rollout commitment. Value the pilot using the decisions possible after its result, including its cost.
Source & credit
Standard estimating practice; the cited guide documents use rather than claiming invention.
GAO: Cost Estimating and Assessment Guide
This explanation and example are independently written. The source is a reading reference; linking it does not grant permission to reuse its text, figures or assessments.