Decision Analysis - Certain Equivalents and Sensitivity Analysis

ISE 562 – Decision Analysis

Lab Assignment 1 – Due Wednesday October 21

Certain Equivalents and Sensitivity Analysis ( Group Assignment)

1) Simple Certain Equivalent Calculator Build a certain equivalent calculator for a decision maker with an exponential u-curve facing a deal with 5 possible prospects with pay-offs. Build a model that allows a sensitivity analysis to the risk aversion coefficient. 2) 1000-degree Certain Equivalent Calculator Build a certain equivalent calculator for a decision maker with an exponential u-curve facing a deal represented by a

• Discretized Uniform distribution on the range 1 – 1000 • Discretized Beta distribution on the range 1- 1000

3) Sensitivity to Value of Clairvoyance In the party problem, the following table represents the probabilities, prospects, and u-values for Kim, Mary, and Jane.

Kim Jane Mary {S|&} 0.4 0.4 0.4

U-curve Risk Neutral Risk Neutral

Valuing Prospects O-S 100.00$ 100.00$ 100.00$ O-R -$ -$ -$ P-S 90.00$ 90.00$ 95.00$ P-R 20.00$ 20.00$ 32.00$ I-S 40.00$ 40.00$ 57.00$ I-R 50.00$ 50.00$ 67.00$

504 1( ) 1 . 3 2

x

U x é ù

æ öê ú= - ç ÷ê úè ø ë û

a) Kim’s risk Odd for $50 are . What is her risk tolerance? b) Build a spreadsheet to calculate the Value of Clairvoyance for each person. c) Conduct a sensitivity analysis to the probability of sun-shine and plot the three-

curves on one graph. d) Conduct a sensitivity analysis of VOC to both probability of sun-shine and the

risk aversion coefficient for Kim.

50 2 :1r =