1. 1 Civil Systems Planning Benefit/Cost Analysis Scott Matthews Courses: 12-706 / 19-702/ 73-359 Lecture 11 - 10/5/2005

2. 12-706 and 73-3592 Admin Issues  PS 3 returned on Monday  Joe and Pauli will give feedback and answers  Early Course Feedback  Lecture

3. 3 Decision Trees Example with Treeplan

4. 12-706 and 73-3594 Risk Profiles  Risk profile shows a distribution of possible payoffs associated with particular strategies.  A strategy is what you plan to do going in to the decision. Holds your plans constant, allows chances to occur  Only eliminate things YOU wouldn’t do, not things “they” might not do.  Its not just finding the NPV of a branch.

5. 12-706 and 73-3595 Cumulative Risk Profiles  Graphs of cumulative distributions  Percent chance that “payoff is less than x”

6. 12-706 and 73-3596 Multi-objective Methods  Multiobjective programming  Mult. criteria decision making (MCDM)  Is both an analytical philosophy and a set of specific analytical techniques  Deals explicitly with multi-criteria DM  Provides mechanism incorporating values  Promotes inclusive DM processes  Encourages interdisciplinary approaches

7. 12-706 and 73-3597 Decision Making  Real decision making problems are MC in nature  Most decisions require tradeoffs  E.g. college-selection problem  BCA does not handle MC decisions well  It needs dollar values for everything  Assumes all B/C quantifiable  BCA still important : economic efficiency

8. 12-706 and 73-3598 MCDM Terminology  Non-dominance (aka Pareto Optimal)  Alternative is non-dominated if there is no other feasible alternative that would improve one criterion without making at least one other criterion worse  Non-dominated set: set of all alternatives of non-dominance

9. 12-706 and 73-3599 Choosing a Car  CarFuel Eff (mpg) Comfort  Index  Mercedes2510  Chevrolet283  Toyota356  Volvo309  Which non-dominated, dominated?

10. 12-706 and 73-35910 Conflicting Criteria  Two criteria ‘conflict’ if the alternative which is best in one criteria is not the best in the other  Do fuel eff and comfort conflict? Usual.  Typically have lots of conflicts.  Tradeoff: the amount of one criterion which must be given up to attain an increase of one unit in another criteria

11. 12-706 and 73-35911 Tradeoff of Car Problem Fuel Eff Comfort 10 5 0 2030 M V T C 1) What is tradeoff between Mercedes and Volvo? 2) What can we see graphically about dominated alternatives?

12. 12-706 and 73-35912 Tradeoff of Car Problem Fuel Eff Comfort 10 5 0 2030 M(25,10) V(30,9) T C 5 The slope of the line between M and V is -1/5, i.e., you must trade one unit less of comfort for 5 units more of fuel efficiency.

13. 12-706 and 73-35913 MCDM with Decision Trees  Incorporate uncertainties as event nodes with branches across possibilities  See summer job example in Chapter 4.  Still need special (external) scales.  And need to value/normalize them  Typically give 100 to best, 0 to worst, find scale for everything between (job fun)  Get both criteria on 0-100 scales!  Also need WEIGHTS between 2 criteria (your preference, nobody else’s!)  Weights - based on ratio best to worst on each scale