1. Introduction to Decision AnalysisObjectives, Probabilities, and Pitfalls

2. Decision Analysis Examples Oil field and services valuation (Shell, Chevron,Schlumberger, ) Pharmaceutical R&D decisions (Eli Lilly, ) Chemical companies (Du Pont, Kodak, ) Banks (contingency planning for data centers,) Assisted living facility (Australia: chooseamong four strategic plans) Allocation of public funds (Germany:evaluation of projects submitted to BerlinGovernment Senate Department forEconomics) 3. Evaluation of Projects Define objectives, e.g.: Cost Number of children reached Expected improvement in Enrollment Performance Graduation rates Evaluate how a project fulfills each objective. Determine probabilities. Perform sensitivity analysis. 4. Probability Assessment Decision and risk analyses typically rely onprobability assessments based on humanjudgment. Judgments should be informed by data whendata is available, but need not be entirelybased on data. Is the past indicative of the future? With new events with no obvious data, are therehistorical analogies? In assessing probabilities from experts, youneed to: Be clear about the questions you are asking and theresponses given, Ask questions that people can reliably answer, and Be aware of potential biases, both cognitive andmotivational. 5. Methods for Assessing Probabilities: Direct Assessment What is your probability that more than 500 childrenbetween ages 7-8 will be enrolled in school underProject X? Use of a reference gamble/Betting odds Many resist direct assessments out of fear ofnot giving the "right probability. Assessing conditional probability assessments may beeasier and have been shown to be more reliable. What is your probability that given that 6. Psychological Pitfalls Anchoring Status Quo Sunk-Cost Confirming Evidence Framing Overconfidence Recallability Base-Rate Prudence Seeing Patterns where none exist 7. Quantity 10th Quantile 50th Quantile 90th Quantile1 Year end close of Dow Jonesfor 19622 Population of Panama (May2010)3 Number of patents forinvention issued by the USPatent and Trademark office(2010)4 Airline distance betweenAustin and New Delhi(miles)5 Birthday of Coach GailGoestenkors(month/day/year)6 Height of Hoover Dam (feet)7 Number of windows in thePentagon8 Diameter of Earths moon(miles)9 Worldwide airplane accidentdeaths on scheduled flightsduring 201010 Release of Star Wars IV(month/day/year) 8. Quantity Value1 Year end close of Dow Jonesfor 1962652.12 Population of Panama (May2010)3,405,8133 Number of patents forinvention issued by the USPatent and Trademark office(2010)219,6144 Airline distance betweenAustin and New Delhi(miles)8347.675 Birthday of Coach GailGoestenkors(month/day/year)2/26/636 Height of Hoover Dam (feet) 726.47 Number of windows in thePentagon7,7548 Diameter of Earths moon(miles)2,1599 Worldwide airplane accidentdeaths on scheduled flightsduring 201081710 Release of Star Wars IV(month/day/year)5/25/77 9. Which of the two programs wouldyou favor? Imagine that the US is preparing for theoutbreak of an unusual Asian disease, which isexpected to kill 600 people. Two alternativeprograms to combat the disease have beenproposed. Assume that the exact scientificestimates of the consequences of the programsare as follows: If Program A is adopted, 200 people will be saved. If Program B is adopted, there is 1/3 probability that600 people will be saved, and 2/3 probability that nopeople will be saved. 10. Which of the two programs wouldyou favor? Imagine that the US is preparing for theoutbreak of an unusual Asian disease, which isexpected to kill 600 people. Two alternativeprograms to combat the disease have beenproposed. Assume that the exact scientificestimates of the consequences of the programsare as follows: If Program C is adopted, 400 people will die. If Program D is adopted, there is 1/3 probability thatnobody will be die, and 2/3 probability that 600 peoplewill die. 11. Assigning Probabilities Consult existing information Collect new data Ask experts Unless they have statistical experience andrelevant data, most people cannot reliablyprovide expected values or standard deviations. Instead assess 5th, 50th and 95th percentiles. Break uncertainties into new components 12. Using Assessed Percentiles inDecision Trees Say your expert provides the following percentileson the number of new enrollments from agegroup 7-10 under project X: 5th percentile : 60 students 50th percentile : 120 students 95th percentile : 185 students This assessment corresponds to the followingscenarios and probabilities: