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framework_toolkit.pdf
Robert T. Clemen Robert T. Clemen Professor Emeritus of Decision Sciences Professor Emeritus of Decision Sciences Fuqua School of Business Fuqua School of
Business Duke University
Decision Analysis: Decision Analysis: Framework and Toolkit
Framework and Toolkit Duke University
What What makes makes decisions decisions hard?
▪ Uncertainty of events ▪ Lack of knowledge ▪ Complexity ▪ Multiple objectives (e.g., risk risk vs. vs. return) ▪ Multiple stakeholders stakeholders ▪ Strategic decisions (game theory) ▪ Constraints
▪ Requirements ▪ Limited resources WayneHastings.com
Limited resources
Why go to all the trouble to learn how to build complicated models and perform intricate complicated models and perform intricate analysis? analysis? Why not just use your intuition (gut)?
Fast ► Unconscious mind Unconscious mind
► Fast, effortless, and automatic Fast, effortless, and automatic
► Based on associations and Based on associations and emotional triggers emotional triggers
► Parallel Parallel “holisticholistic” processing,
processing, pattern matching pattern matching
► Experience Experience
▪ What took deliberation What took deliberation yesterday can be intuitive yesterday can be intuitive today.
Intuition vs. Deliberation Intuition vs. Deliberation
Conscious mind ► Effortful, requires requires attention ► Logical connections ► Linear Linear processing processing ► Systematic learning
Slow
How do we get from intuition to deliberation? How do we get from intuition to deliberation? Decision analysis Decision analysis – A logical framework and logical framework and collection of tools for collection of tools for deliberative thinking. deliberative thinking.
Decision analysis framework ►
Decompose problem into into pieces ▪ Objectives – what we we care care about
▪ Decisions Uncertain – events immediate – and probabilities downstream (or associated analyst’s)
▪ Consequences – what we get at the end ►
Jack Rabbit Racing Jack Rabbit Racing Just before the start of a race in which Jack Rabbit Racing (JRR) is entered, Jack LePore has to decide whether to withdraw from the race or go ahead. JRR has experienced a number of engine failures over the past few months, and another engine failure today would be devastating to
the team. However, in those races when the engine has not failed, they have won frequently, and another win today would lead to additional sponsors and the resources to do even better next year ...
““Soft Soft”” Tools Tools Understanding, cooperation,
collaboration, buyin Facilitation, consensus building
Organizational process
Decision quality
Framing
Analytical Analytical Tools
Tools ModelAnalysisInsight License technology
Competitor Competitor A A
Introduce Introduce new new product product A A
No No new new product product
Do Do not not license license technology technology
Abandon Abandon our our product? product?
Introduce Introduce our our product product
Capacity of scheduled flights
40%
60%
Operating cost/hour
$260
$230
Hours flow n
500
1000
License
Charter price/hour
$300
$350
technology
Proportion of chartered flights
0.45
0.7 Abandon Abandon
Ticket price/hour our our product? product?
Insurance
Proportion financed
Introduce Introduce our our product product
$95
$108
$25,000
$18,000
0.5
0.3
Interest rate
13.00%
10.50%
Purchase price
$90,000
$85,000
$15,00
$10,00
$5,000 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 0
0
Profit
Decision Trees Sensitivity Analysis Ebel Mine
Frequency Chart
100
80 s r u o H 2 e n i
Certainty is 50.33% from Infinity to $0 $
0
Optimization 60 Feasible region
M
40
20
10 10 30 50 70 90 110 130
Mine 1 Hours
Forecast: Qty = 3000
3,000 Trials 4 Outliers
.019
58
.015
43.5
.010
29
.005
14.5
.000
0
($84,923) ($34,166) $16,591 $67,348 $118,106
Monte Carlo Simulation
