Sensitivity analysis Finds most important issues that matter
- Slides: 7
Sensitivity analysis • Finds most important issues that matter in a decision • Helps develop requisite model (a model that addresses all issues that matter most) • Tools for sensitivity analysis – One-way sensitivity analysis: examines effect of variables on consequences by considering one variable at a time. Tornado diagrams. – Two-way sensitivity analysis: examines effect of changes of two variables on consequences. Two-way sensitivity graph showing regions in which each strategy is optimum in the space of the two variables. – Sensitivity to probabilities of uncertain events. Two-way sensitivity graph showing regions in which each strategy is optimum in the space of two probabilities. 1
Decision process Identify decision situation and understand objectives Identify alternatives Model problem structure Uncertainty Preferences Update model Make the decision Sensitivity analysis Further analysis needed? Y N Implement decision 2
Decision about purchasing new airplane Operating cost Hours flown Insurance Total cost Price Interest rate Proportion financed Finance cost Capacity of scheduled flights Revenue Proportion of charter flights Charter price Ticket price Profit Purchase 3
Influence diagram for studying sensitivity to probabilities Operating cost Hours flown Capacity of scheduled flights Insurance Total cost Price Interest rate Proportion financed Finance cost Revenue Proportion of charter flights Charter price Ticket price Profit Purchase 4
Decision tree Hours flown Capacity sch. fl. Operating cost 650, r 45% $253 p q 55% 1 -q Purchase? 45% Y $237 1 -p N Consequence q 55% 1 -q 900, 1 -r 650, s 900, 1 -s 650, r -$9, 725 -$4, 225 $6, 525 $18, 275 $675 900, 1 -r $10, 175 650, s $16, 925 900, 1 -s $32, 675 $4, 200 5
Decision tree after making assumptions Hours flown Capacity sch. fl. Operating cost 650, r 45% $253 0. 5 q 55% 1 -q Purchase? 45% Y $237 0. 5 N Consequence q 55% 1 -q 900, 1 -r 650, 0. 8 r -$9, 725 -$4, 225 $6, 525 900, 1 -0. 8 r $18, 275 650, r $675 900, 1 -r $10, 175 650, 0. 8 r $16, 925 900, 1 -0. 8 r $32, 675 $4, 200 6
Two-way sensitivity graph Inv. Money Market Buy airplane A B A: uncertainty in probabilities p and q does not affect decision: buy airplane is the best decision 7 B: decision is sensitive to probabilities p and q
