Decision and Risk Analysis Systems 473

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Decision and Risk AnalysisSystems 473

• Dr. Rajesh Ganesan
• classweb.gmu.edu/rganesan
• rganesan_at_gmu.edu

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Definitions

• Decision An irrevocable allocation of resources
• The use of resources makes the decision important
• Money
• Time
• People

• A decision must have
• Alternatives to choose among
• Outcomes for each alternative
• A value structure within which to order / rank
  outcomes
• Assumptions relating to all of the above
• A decision may have
• A probability measure on possible outcomes
• A probability measure on future conditions
  (states of nature)
• An active opponent trying to defeat your decision

Ref slides from Dr. Loerch
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Alternatives and Choice

• A decision is a commitment to an action, taken by
  the decision
• maker.
• The commitment involves making a choice between
• alternative courses of action.
• We distinguish between the alternatives, which
  are the various courses of action available to
  the decision maker, and
• the choice, which is the alternative selected for
  action by the decision maker.

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Risk and Uncertainty
Risk is the variability in our estimation of the
outcome of a choice, including both better and
worse-than-hoped-for events. Uncertainty is the
cause of risk. It includes our imperfect and
incomplete understanding of the laws of nature,
our inability to mathematically model artifacts
with total precision, our inability to know
initial states of a system with total precision,
our inability to carry out precise calculations,
and the notion that some things may simply be
non-deterministic, such as quantum mechanical
effects.
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Decision Analysis

• What makes a decision hard to make?
• Competing objectives
• Uncertainty
• Politics
• Lack of information
• Differing perspectives of Decision makers
• Disagreement over what is to be accomplished
• Complexity
• Note Some of these overlap

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Decision Analysis

• What is decision analysis?
• A Method to
• Organize or structure complex problems for
  analysis
• Deal with tradeoffs between multiple objectives
• Identify and quantify sources of uncertainty
• Incorporate subjective judgments

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Decision Analysis tenets.

• Quality decision making requires a systematic
  process to incorporate
• Information, expert opinion, and preferences
• Complex decisions in large organizations involve
• Functional experts (inside)
• RD, engineers, operations, production, finance,
  etc.
• Interested stakeholders (outside)
• Stockholders, government, community, etc.

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Decision Analysis tenets(continued)

• 3. Quantification offers significant benefits
• Clarifies thinking
• Values
• Uncertainties (Probability)
• Consequences
• Improves communications
• Enables logical reasoning
• 4. Support decision maker judgments by providing
  insights (more about dealing with decision makers
  later)

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Purpose of Decision Analysis

• To provide insight to the Decision Maker
• Not make the decision for the decision maker
• 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 dont worry about it!

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• Read Chapter 1