Decision and Risk Analysis Objectives: –It is a specific thing that you want to achieve...

Decision and Risk Analysis

• Objectives: – It is a specific thing that you want to achieve– Decision making can be guided by one or

multiple objectives• Values:

– An individual’s objectives taken together make up his or her values

• Outcomes:– The possible things that can happen while trying

to resolve an uncertain event through a decision analysis process

More Definitions

Ref: slides from Dr. Loerch


More Definitions (contd.)

• Information:

– Information relates to a specific decision—it is what the decision is based on.

Information can be measured as the probability that the preferred choice in a specific decision with specific alternatives will lead to the outcome most desired from among the outcomes actually achievable from the available alternatives


Strategic decisions involve four critical components

• Understanding of the future is critical to all three elements.• Use strategic values to identify future decision opportunities.

ValuesWhat do we want?

InformationWhat do we know?

AlternativesWhat can we do?

FutureWhat could

happen?


Decision Analysis ProcessIdentify Problem

Identify Objectives (values)

Identify Alternatives

Decompose and Model Problem – Structure – Uncertainty – Preference

Choose Best Alternative

Sensitivity Analysis

MoreAnalysis Needed

Make Recommendation

Yes

No


Decision Analysis has many successful applications. • Private

– Automotive• General Motors• Ford

– Oil & Gas• Chevron• Phillips Petroleum

– Pharmaceutical• Johnson & Johnson• Eli Lilly• Bristol Myers Squibb

– Aerospace– Medical– IT

• Kodak

– R&D Portfolios– etc.

• Public– DoD

• Joint Staff• Air Force• Army• Navy/Marines

– DOE• Nuclear Waste• Hazardous Chemicals• S&T

– Intelligence Community• CIA• NRO• NSA• CIFA

– NASA– etc.


Types of decisions

• One time decisions

– Analysis performed only once

• Sequential decisions but Analysis performed only once

Dynamic Decisions – Analysis performed more than once

– Time is a factor

Static Decision


Decision Analysis For System Design

• The purpose of a design is:

– To solve a problem

– To overcome a shortcoming

– To improve a situation

• Design involves decision making

• The same procedures that provide a framework for other decision processes work for design decisions as well


Measurement

• Most important step in analysis - What should be measured?

• Goes by many names:

– Measure of Effectiveness (MOE)

– Measure of Performance

– Measure of Merit

– Objective

– Measure of Benefit (vice Cost)

– Metric

• Must reflect outcome of decision


Risk

• Definition: (Oxford English Dictionary) “Exposure to the possibility of loss, injury, or other

adverse circumstance”

Risk is the variability in our estimation of the outcome of a choice, including both better and worse-than-hoped-for events.

• Three Issues– How bad could it get? Must measure bad outcome in

some sense– How possible is the bad outcome? Need probability

distribution on possible outcomes.– How much do I care? Risk attitude of decision maker


Decision Analyst

vs

Decision Maker


Purpose of Decision Analysis

• To provide insight to the Decision Maker

• Not make the decision for him/her

• Difference between Decision Maker and Analyst

– 3 things that a decision maker can do with your analysis

• Use it

• Modify it

• Throw it away

– Do a good job and don’t worry about it!


Analysts need to better understand decision-making process

Rational Emotional

Political


Interacting with Decision Makers

• We as systems engineers and analysts are seldom the decision maker!

• Understanding– Senior level decision-making– Senior decision-makers– Decision analysts

• Presentations to senior decision-makers– Discussing potential new analyses– Obtaining approval for analysis plan– Providing a decision briefing


Who are Decision Makers ?


Characteristics of Decision Makers

• Busy

– Difficult to see

– Gatekeepers control access

• Establish vision and strategic objectives

– Interested in how your idea fits with their agenda

– Knowing their objectives is valuable

• Control resources

– Analysis champion requires their approval

– Their support is usually critical

Get access to senior leaders early in the analysis and at key decision points.


Senior decision-makers need to better communicate with analysts

• Define the problem

• Describe the desired product

• State the need date

• Identify the constraints

• Provide resources


Three proven guidelines to successful presentations to senior leaders

• Allow time for the senior decision-maker to talk – Once you are in let them determine how long you stay

• Use fewer and better slides– Use 10-15 slides for 30 minutes– Always state (restate) the problem/issue/challenge– Put a summary of the key message on every chart– Brief the message

• “Seek first to understand then to be understood”– Listen to the question– Answer questions briefly and clearly

• Make sure you are working the right problem.


Decision analysts need to provide executive summary presentations to senior decision-

makers• When the analysis is finished you are 50% done

• Pre-brief key advisors

– Incorporate their comments and suggestions

– Used more detailed briefings

• Do not use your own perceptions

– Summarize the results of your systematic analysis

– Tell what is means to the decision-maker

• Keep the charts clear and concise

– Tell a story

– Avoid extraneous information• Extensively use graphs, colors, and pictures


Summary

• Communicating with senior managers– Get access early and often

– Make sure you are working the right problem

– Respect their time

– Need to remind them of your project

– Provide executive summary briefings

– One chart summary

• Three communication opportunities– Get started – understand the decision-maker’s problem

– Obtain approval for work plan - systematic approach

– Provide a decision briefing - tell a story


Definition

• Consequence:

– It’s the final fate of the Decision Maker


Time value of Money

• If an investment of $100 at 10% annual interest yields $110 after 1 year its present value (PV) is

PV = X

(1+r)n

X = amount received after n yearsR= rate of interest per year

The net present value is NPV = PV of returns on investment – investment

The PV is =110/(1+0.1)=$100.NPV= $100-$100 = 0.


Time value of Money

• The return on $ 425 investment is – Year 1 2 3 4– Return $ 110 121 133.1 146.41

Assume savings bank interest rate = 10% compounded annually. Total money earned = $ 622.24 (use compound interest formula)

Is this a good investment in comparison to the savings bank?

Total return = 110+121+133.1+146.41 = $510.51


Time value of Money

• Calculate PV• PV = 110/(1+0.1) + 121 /(1+0.1)2 + 133.1 /(1+0.1)3 +

146.41/(1+0.1)4

PV = 100+100+100+100=400

NPV = PV – investment = 400-425 = -$25

Savings bank NPV = 425-425=0

It is not worth investing. Put the money in savings!!

What if the investment gives back in $ 130 140 150 160 (Total = 580) for each of the 4 years?

PV = 455.86

NPV= 455.86-425= 30.86 (better than a savings bank)


Reading Assignment

• Read Chapter 1 and 2 of the textbook

• Next topic– Refresher on Probability Chapter 7, 8, 9

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