Decision Analysis
Techniques
Sensitivity Analysis
2-1
Sensitivity Analysis: A modelling
Approach
Example:
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Sensitivity analysis answers the question, “What makes
a difference in this decision?”.
It differentiates among “what matters?” and “what
does not matter?” throughout the modelling process for
the specific decision.
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
3. Influence diagram representing the Eagle Airlines decision
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
4. Calculate cost based on “Base” values
Sensitivity Analysis: A modelling
Approach
Sensitivity
Analysis
One-Way Sensitivity Analysis
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Sensitivity Analysis: A modelling
Approach
5. Identify, “What variables really make a difference in terms
of the decision at hand?”
Sensitivity Analysis: A modelling
Approach
5. Identify, “What variables really make a difference in terms
of the decision at hand?”
Sensitivity Analysis: A modelling
Approach
5. Identify, “What variables really make a difference in terms
of the decision at hand?”
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
1. At the start of modelling a decision making process, the
question that we ask is;
“Are we solving the right problem?”
The answer to this question can be obtained through careful
thought process regarding decision context.
Because, addressing a different situation (question and
problem) will lead to a very different decision.
2. Solving a wrong problem is called “error of the third kind”,
which means, a wrong question was asked, decision context
was inappropriate, and hence, wrong problem was solved.
Sensitivity Analysis: A modelling
Approach
“How can one avoid a Type III error?”
The best solution is simply to keep asking whether the
problem on the surface is the real problem. Is the context
properly specified? What exactly is the “unscratched itch” that
the decision maker feels?
In the subjected example, the real question may be how to
satisfy Carother’s desires for expansion rather than simply
how to acquire more airplanes.
Sensitivity Analysis: A modelling
Approach
7. Dominance Considerations
In sensitivity analysis, analyzing alternatives for dominance
amounts to asking whether there is any way that one
alternative could end up being better than a second.
In the foregoing example, the alternatives are buying
apartment in, (1) Astoria, (2) Bernard (3) Charlette.
Sensitivity
Analysis
Two-Way Sensitivity Analysis
It helps in obtaining the information about joint
impacts of two or more variables on the model
objective value.
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Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Philip Musa can build either a large electronics section or a small one in his
Birmingham drugstore. He can also gather additional information or simply do
nothing. If he gathers additional information, the results could suggest either a
favorable or an unfavorable market, but it would cost him $3,000 to gather the
information. Musa believes that there is a 50–50 chance that the information will be
favorable. If the market is favorable, Musa will earn $15,000 with a large section or
$5,000 with a small one. With an unfavorable electronics market, however, Musa
could lose $20,000 with a large section or $10,000 with a small section. Without
gathering additional information, Musa estimates that the probability of a favorable
market is .7. A favorable report from the study would increase the probability of a
favorable market to .9. Furthermore, an unfavorable report from the additional
information would decrease the probability of a favorable market to .4. Of course,
Musa could ignore these numbers and do nothing. What is your advice to Musa? Do a
two-way sensitivity analysis on Payoffs of large sections in without collecting market
info and cost of market info with 50% variation in the base values.
Sensitivity
Analysis
Sensitivity to probabilities
Now the uncertainties surrounding critical
variables identified by Tornado Diagram will be
modeled.
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Sensitivity Analysis: A modelling
Approach
Sensitivity to probabilities
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis: A modelling
Approach
Sensitivity Analysis in Action
Heart disease in infants
Sensitivity Analysis in Action
Two-way
sensitivity
analysis for
the heart
disease
treatment