Da1 - Engineering Risk Benefit Analysis 1.155 2.943 3.577 6.938 10.816 13.621 16.862 22.82 ESD.72 ESD.721 DA 1 The Multistage Decision Model George

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DA 1. The Multistage Decision Model 1 Engineering Risk Benefit Analysis 1.155, 2.943, 3.577, 6.938, 10.816, 13.621, 16.862, 22.82, ESD.72, ESD.721 DA 1. The Multistage Decision Model George E. Apostolakis Massachusetts Institute of Technology Spring 2007
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DA 1. The Multistage Decision Model 2 Why decision analysis? A structured way for ranking decision options by: 1. Enumerating the immediate and later choices available to the DM 2. Characterizing the relevant uncertainties 3. Quantifying the relative desirability of outcomes 4. Providing rules for ranking the decision options, thus helping the DM to select the “best” one.
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DA 1. The Multistage Decision Model 3 Value of formal analysis Provides a systematic way to process large amounts of information Decision making process is explicit and enhances communication Provides formal rules for quantifying preferences
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DA 1. The Multistage Decision Model 4 Limitations of DA The theory is for an individual decision maker. This reduces considerably its applicability in practice. (But, great normative tool.) In most cases there is no satisfactory way to combine the utility function of several people • As with all formal analysis, the results are no better than the quality of the model and its supporting assessments The required inputs may not be easily obtainable
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DA 1. The Multistage Decision Model 5 Manufacturing Example Decision: To continue producing old product (O) or convert to a new product (N). The payoffs depend on the market conditions: s: strong market for the new product m: mild market for the new product w: weak market for the new product
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DA 1. The Multistage Decision Model 6 Manufacturing Example Payoffs Earnings (payoffs): L 1 : $150,000, old product, P[L 1 /O] = 1.0 L 2 : $300,000, new product and the market is strong, P[s] = P[L 2 /N] = 0.3 L 3 : $100,000, new product and the market is mild, P[m] = P[L 3 /N] = 0.5 L 4 : -$100,000, new product and the market is weak, P[w] = P[L 4 /N] = 0.2
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DA 1. The Multistage Decision Model 7 Building the decision tree N L 3 $100K L 4 -$100K O Decision Options Payoffs L 2 $300K L 1 $150K Payoff depends on market
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DA 1. The Multistage Decision Model
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This note was uploaded on 11/08/2011 for the course AERO 16.851 taught by Professor Ldavidmiller during the Fall '03 term at MIT.

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Da1 - Engineering Risk Benefit Analysis 1.155 2.943 3.577 6.938 10.816 13.621 16.862 22.82 ESD.72 ESD.721 DA 1 The Multistage Decision Model George

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