Handbook of Decision Analysis

Front Matter......Page 1
Title Page......Page 3
Copyright......Page 4
Contents......Page 5
List of Figures......Page 8
List of Tables......Page 12
This Handbook Is Timely......Page 14
Decision Professionals: The Practitioner Perspective......Page 15
Our Profession......Page 17
The Biggest Challenge......Page 18
Preface......Page 19
Acknowledgments......Page 22
About the Authors......Page 24
Acronyms......Page 27
1 - Introduction to Decision Analysis......Page 29
1.1  Introduction......Page 30
1.2  Decision Analysis Is a Socio-Technical Process......Page 32
1.3  Decision Analysis Applications......Page 36
1.3.1  Oil and Gas Decision Analysis Success Story: Chevron......Page 37
1.3.2  Pharmaceutical Decision Analysis Success Story: SmithKline Beecham......Page 39
1.4  Decision Analysis Practitioners and Professionals......Page 40
1.4.2  Decision Analysis Professional Organizations......Page 41
1.4.3  Problem Domain Professional Societies......Page 42
1.5  Handbook Overview and Illustrative Examples......Page 43
1.5.2  Geneptin Personalized Medicine for Breast Cancer (by Sean Xinghua Hu)......Page 44
1.5.3  Data Center Location and IT Portfolio (by Gregory S. Parnell and Terry A. Bresnick)......Page 46
Key Terms......Page 47
References......Page 48
2 - Decision-Making Challenges......Page 50
2.1  Introduction......Page 51
2.3  Decision-Making Challenges......Page 52
2.4.1  Culture......Page 54
2.4.2  Impact of Stakeholders......Page 56
2.4.3.2  Tactical Decision Making......Page 57
2.5.1  Dispersion of Knowledge......Page 59
2.5.4  Role of Experts......Page 60
2.6.1  Decision Traps and Barriers......Page 61
2.6.2  Cognitive Biases......Page 63
2.7  Two Anecdotes: Long-Term Success and a Temporary Success of Supporting the Human Decision-Making Process......Page 68
2.8.1  Roughneck North American Strategy (by Eric R. Johnson)......Page 69
2.8.3  Data Center Decision Problem (by Gregory S. Parnell)......Page 70
Key Terms......Page 71
References......Page 72
3 - Foundation of Decision Analysis......Page 74
3.1  Introduction......Page 75
3.2  Brief History of the Foundations of Decision Analysis......Page 76
3.3  Five Rules: Theoretical Foundation of Decision Analysis......Page 77
3.4  Scope of Decision Analysis......Page 82
3.5.1  Terminology......Page 83
3.5.3  Single-Objective Decision Analysis......Page 84
3.5.5  Taxonomy Division: Addressing Value Trade-Offs and Risk Preference Separately or Together?......Page 86
3.5.7  Taxonomy Division: Degree of Simplicity in Multidimensional Value Function......Page 89
3.6.1.1  Start with Values......Page 90
3.6.2  The Benefits of VFT......Page 91
Key Terms......Page 93
References......Page 94
4 - Decision Analysis Soft Skills......Page 96
4.1  Introduction......Page 97
4.2  Thinking Strategically......Page 98
4.3  Leading Decision Analysis Teams......Page 99
4.4  Managing Decision Analysis Projects......Page 100
4.6  Interviewing Individuals......Page 101
4.6.1  Before the Interview......Page 103
4.6.3  During the Interview......Page 104
4.6.4  After the Interview......Page 105
4.7.1  Preparing an Effective Survey: Determine the Goals, Survey Respondents, and Means of Distributing and Collecting Survey Data......Page 106
4.7.2  Executing a Survey Instrument: Developing the Survey Questions, Testing, and Distributing the Survey......Page 107
4.8  Facilitating Groups......Page 108
4.8.1  Facilitation Basics......Page 109
4.8.2.1  Stages of Group Development......Page 111
4.8.2.4  Pacing......Page 112
4.8.3.1  Preparing for the Focus Group Session......Page 114
4.9  Aggregating across Experts......Page 115
4.10  Communicating Analysis Insights......Page 116
Key Terms......Page 117
References......Page 118
5 - Use the Appropriate Decision Process......Page 120
5.2.1  Decision Quality......Page 121
5.2.2  The Six Elements of Decision Quality......Page 122
5.2.3  Intuitive versus Deliberative Decision Making......Page 123
5.3.1.1  How  Urgent  Is  the  Decision?......Page 124
5.3.1.3  Why Is This Decision Difficult to Make?......Page 125
5.3.2.1  Dialogue Decision Process......Page 126
5.3.2.4  Third Decision Board Meeting: Evaluated Alternatives......Page 127
5.3.2.5  Fourth Decision Board Meeting: Implementation Plan......Page 128
5.3.3.1  Strictly Analytical Decision Processes......Page 130
5.4.1  Roughneck North American Oil Strategy......Page 131
5.4.2  Geneptin Personalized Medicine......Page 132
5.4.3  Data Center......Page 133
5.6  Decision Maker’s Bill of Rights......Page 134
5.7  Summary......Page 135
References......Page 136
6 - Frame the Decision Opportunity......Page 138
6.1  Introduction......Page 139
6.3  What Is a Good Decision Frame?......Page 140
6.4  Achieving a Good Decision Frame......Page 142
6.4.1  Vision Statement......Page 143
6.4.2  Issue Raising......Page 144
6.4.3  Categorization of Issues......Page 145
6.4.4  Decision Hierarchy......Page 146
6.4.6  Initial Influence Diagram......Page 147
6.5.1  Roughneck North American Strategy (RNAS)......Page 148
6.5.2  Geneptin Personalized Medicine......Page 149
6.5.3  Data Center Decision......Page 150
Key Terms......Page 153
References......Page 154
7 - Craft the Decision Objectives and Value Measures......Page 155
7.1  Introduction......Page 156
7.2  Shareholder and Stakeholder Value......Page 157
7.2.2  Government Agency Example......Page 158
7.3  Challenges in Identifying Objectives......Page 159
7.4.1  Questions to Help Identify Decision Objectives......Page 160
7.4.2.1  Research......Page 161
7.5  The Financial or Cost Objective......Page 162
7.5.2  Cost Objective for Public Organizations......Page 163
7.6  Developing Value Measures......Page 164
7.7.1  Value Hierarchies......Page 165
7.7.2.1  Platinum  Standard......Page 167
7.7.2.4  Combined  Standard......Page 168
7.7.4.2  Risk Objective......Page 169
7.8.2  Geneptin (by Sean Xinghua Hu)......Page 171
7.8.3  Data Center Location (by Gregory S. Parnell)......Page 172
7.9  Summary......Page 173
Key Terms......Page 174
References......Page 175
8 - Design Creative Alternatives......Page 177
8.2  Characteristics of a Good Set of Alternatives......Page 178
8.3  Obstacles to Creating a Good Set of Alternatives......Page 180
8.4  The Expansive Phase of Creating Alternatives......Page 182
8.5  The Reductive Phase of Creating Alternatives......Page 183
8.6  Improving the Set of Alternatives......Page 186
8.7.1  Roughneck North American Strategy (by Eric R. Johnson)......Page 187
8.7.2  Geneptin Personalized Medicine (by Sean Xinghua Hu)......Page 188
8.7.3  Data Center Location (by Gregory S. Parnell)......Page 190
8.8  Summary......Page 191
References......Page 192
9 - Perform Deterministic Analysis and Develop Insights......Page 194
9.1  Introduction......Page 195
9.2  Planning the Model: Influence Diagrams......Page 197
9.3  Spreadsheet Software as the Modeling Platform......Page 199
9.4.2  Parameterize Everything......Page 200
9.5  Organization of a Spreadsheet Decision Model......Page 201
9.5.2  Decisions......Page 203
9.5.3  Uncertainties......Page 204
9.5.5  Time......Page 205
9.5.6  Representation of Business Units, Value Components, and Time: P&L Calculation Sheet(s)......Page 206
9.5.7  Inputs Sheet(s)......Page 207
9.5.7.1  Strategies......Page 208
9.5.7.2  Documentation Worksheet......Page 209
9.6.3  Calculations Sheets......Page 210
9.7  Debugging the Model......Page 211
9.8  Deterministic Analysis......Page 212
9.8.1  Sources of Value......Page 214
9.8.2  Deterministic Sensitivity Analysis......Page 217
9.8.2.1  Difference  Tornado......Page 219
9.8.3  Scenario Analysis......Page 220
9.9  Deterministic Modeling Using Monetary Multidimensional Value Functions (Approach 1B)......Page 221
9.10  Deterministic Modeling Using Nonmonetary Multidimensional Value Functions (Approach 1A)......Page 222
9.10.1  The Additive Value Function......Page 223
9.10.2  Single-Dimensional Value Functions......Page 224
9.10.3  Swing Weights......Page 228
9.10.4  Swing Weight Matrix......Page 229
9.10.4.2  Assessing Unnormalized Swing Weights......Page 230
9.10.5  Scoring the Alternatives......Page 231
9.10.5.4  Scoring  by  Alternative  Champions  Reviewed  by  a  Panel......Page 232
9.10.6.2  Value Gaps......Page 233
9.11.1  Geneptin......Page 234
9.11.2.1  Additive Value Model......Page 236
9.11.2.5  Scoring the Alternatives......Page 237
9.11.2.9  Value Components......Page 239
9.11.2.11  Value versus Cost......Page 245
9.11.2.12  Waterfall Chart......Page 246
9.11.2.13  Sensitivity Analysis......Page 247
9.11.2.14  Value-Focused  Thinking......Page 249
Key Terms......Page 250
References......Page 253
10 - Quantify Uncertainty......Page 255
10.1  Introduction......Page 256
10.2  Structure the Problem in an Influence Diagram......Page 257
10.3.1  Heuristics and Biases......Page 263
10.3.2  Reference Events......Page 264
10.3.3  Assessment Protocol......Page 266
10.3.4  Assessing a Continuous Distribution......Page 268
10.3.5  Conditioning Cases......Page 270
10.3.6  The Reluctant Expert......Page 272
10.5  Summary......Page 273
Key Terms......Page 274
References......Page 275
11 - Perform Probabilistic Analysis and Identify Insights......Page 276
11.1  Introduction......Page 277
11.2.1  Decision Trees......Page 278
11.2.1.1  Example  Decision  Tree  Application......Page 279
11.2.2  Simulation......Page 283
11.2.2.1  Monte  Carlo  Sampling......Page 284
11.2.2.2  Cumulative  Probabilities  and  Uncertainties......Page 285
11.2.3  Choosing between Monte Carlo Simulation and Decision Trees......Page 286
11.2.3.2  Number of Uncertainties......Page 287
11.2.4  Software for Simulation and Decision Trees......Page 288
11.3  The Value Dialogue......Page 289
11.3.2  Total Value and Value Components......Page 290
11.3.3  Cash Flow over Time......Page 294
11.3.4  Direct EV Tornado Diagram......Page 295
11.3.5  Delta EV Tornado Diagram......Page 297
11.3.6  One-Way and Two-Way Sensitivity Analysis......Page 298
11.3.7.1  Value of Information......Page 300
11.3.7.2  Value of Control......Page 302
11.3.8  Real Options......Page 303
11.3.9  S-Curves (Cumulative Probability Distributions)......Page 304
11.3.10  Flying Bar Charts......Page 307
11.4  Risk Attitude......Page 308
11.4.2  Exponential Utility......Page 309
11.4.3  Assessing Risk Tolerance......Page 310
11.4.4  Calculating Certain Equivalents......Page 311
11.4.5  Evaluating “Small” Risks......Page 312
11.5.1  Geneptin Example......Page 313
11.5.2  Data Center......Page 314
11.6  Summary......Page 315
Key Terms......Page 316
References......Page 318
12 - Portfolio Resource Allocation......Page 319
12.1  Introduction to Portfolio Decision Analysis......Page 320
12.2  Socio-Technical Challenges with Portfolio Decision Analysis......Page 321
12.3.1  Characteristics of Portfolio Optimization......Page 322
12.3.2  Greedy Algorithm Using Profitability Index and the Efficient Frontier......Page 323
12.3.3  Application to Roughneck North American Strategy Portfolio......Page 327
12.3.4  Portfolio Risk Management......Page 328
12.4  Multiobjective Portfolio Analysis with Resource Constraints......Page 329
12.4.2.1  Identify  the  Objective.......Page 330
12.4.2.2  Generate  Options......Page 331
12.4.2.4  Assess  Benefits......Page 334
12.4.2.5  Specify Constraints......Page 335
12.4.2.6  Allocate Resources......Page 336
12.4.2.7  Perform Sensitivity Analysis......Page 338
12.4.3  Application to the Data Center Portfolio......Page 339
12.4.4  Comparison with Portfolio Optimization......Page 341
12.4.5  Strengths and Weaknesses of Incremental Benefit/Cost Portfolio Analysis......Page 342
12.5  Summary......Page 345
Key Terms......Page 346
References......Page 347
13 - Communicating with Decision Makers and Stakeholders......Page 348
13.1  Introduction......Page 349
13.3  Communicating with Senior Leaders......Page 351
13.4  Communicating Decision Analysis Results......Page 355
13.4.1  Tell the Decision Maker the Key Insights and Not the Details......Page 356
13.4.2  Communicating Quantitative Information......Page 357
13.4.3  Determining and Telling the Story......Page 358
13.4.4  Best Practices for Presenting Decision Analysis Results......Page 360
13.5.1  Roughneck North America Strategy (by Eric R. Johnson)......Page 363
13.5.2  Geneptin (by Sean Xinghua Hu)......Page 364
13.6  Summary......Page 365
Key Terms......Page 366
References......Page 367
14 - Enable Decision Implementation......Page 368
14.1  Introduction......Page 369
14.3  Involving Decision Implementers in the Decision Process......Page 370
14.4.2  Using Decision Analysis Models to Support Decision Implementation......Page 373
14.4.2.2  Example  2:  Information  Assurance  Program  Progress......Page 374
14.4.3.1  Example......Page 376
14.6  Summary......Page 377
References......Page 378
15 - Summary of Major Themes......Page 379
15.1  Overview......Page 380
15.2  Decision Analysis Helps Answer Important Decision-Making Questions......Page 381
15.3.2  Multiple Objective Value......Page 382
15.5  Decision Analysts Need Decision-Making Knowledge and Soft Skills......Page 383
15.5.2  Decision Analysts Must Develop Their Soft Skills......Page 384
15.6.2  Decision Conferencing......Page 385
15.7  Decision Analysis Offers Powerful Analytic Tools to Support Decision Making......Page 386
15.7.1  Portfolio Resource Allocation......Page 388
15.8  Conclusion......Page 389
Appendix A - Probability Theory......Page 390
A.2  Distinctions and the Clarity Test......Page 391
A.4  Probability as an Expression of Degree of Belief......Page 392
A.7.1  Joint Probability......Page 393
A.7.3  Conditional Probability......Page 394
A.8  Calculating Joint Probabilities......Page 395
A.10  Reversing Conditional Probabilities: Bayes’ Rule......Page 396
A.11  Probability Distributions......Page 397
A.12  Combining Uncertain Quantities......Page 399
References......Page 401
B.1  Introduction......Page 402
B.2  Influence Diagram Elements......Page 403
B.3.1  Rule 1: No Loops......Page 406
References......Page 407
Appendix C - Decision Conferencing......Page 409
C.1  Introduction......Page 410
C.2  Conference Process and Format......Page 411
C.3  Location, Facilities, and Equipment......Page 412
C.4  Use of Group Processes......Page 413
C.5  Advantages and Disadvantages......Page 414
C.6  Best Practices......Page 416
Key Terms......Page 418
References......Page 419
Index......Page 420