Decision and Risk Analysis Systems 473 Dr. Rajesh Ganesan classweb.gmu.edu/rganesan rganesan@gmu.edu

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

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.

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.

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

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

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) R&D, engineers, operations, production, finance, etc. Interested stakeholders (outside) Stockholders, government, community, etc.

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)

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 don’t worry about it!

Read Chapter 1