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Readings on the Principles and Applications of Decision Analysis

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Readings on the Principles and Applications of Decision Analysis STRATEGIC DECISIONS GROUP READINGS ON DION lalaDOS DERDR sd RONALD A.HOWARD & JAMESE.MATHESON VOLUME I: GENERAL COLLECTION STffiICDECISIONSGROUP o o READINGSON fre les and Apphcadons of EDITEDBY RONALD A.HO\IARD & JAlv{ES E.}vIAIHESON VOLI.,ME I: GENERAL COLLECTTON EDI TORS Ronal d A. Howard James E. Matheson PRODUCTION STAFF Rebecca Sul I i vdr, Coord i nator Paul Steinberg, Copy Editor Lesl ie Fleming, Graphics @ 1983 by Strategic Decisions Group. Printed in the United States of America. All rights reserved. No part of this material may be reproduced or used without prior wri tten permission from the authors and /or hol ders of copyr.i ght. CONTENTS VOLUME I: GENERAL COLLECTION foreword.. .o.....o. , vll What is Decision Analysis? viii INTRODUCTION AND OVERVIEW 1 Preface 3 1. The Evolution of Decision Analysis . .. .. .. 5 R. A. Howard 2. An Introduction to Decision Analysis . .17 l. E. Matheson and R. A. Howard 3. Decision Analysis in Systems Engineering . .57 R. A. Howard 4. Decision Analysis: Applied Decision Theory 95 R. A. Howard 5. A Tutorial lntroduction to Decision Theory 115 D. W. North 6.A Tutorial in Decision Analysis . 129 C.5. Sta€;l von Holstein 7.The Science of Decision-Making . 159 R. A. Howard B. An Assessment of Decision Analysis 177 R. A. Howard APPLICATIONS . .203 Preface 205 lnvestment and Strategic Planning 9. Decision Analysis Practice: Examples and lnsights . .....209 J. E. Matheson 10. Decision Analysis of a Facilities lnvestment and Expansion Problem . .227 C. S. Spetzler and R. M. hmora 11. Strategic Planning in an Age of Uncertainty. .259 M. M. Menke 12. A Decision Analysis of a Petrochemical Expansion Study .269 T J. Braunstein 13. The Dangerous Quest for Certainty in Market Forecasting 285 R, Abt, M. Borja, M. M. Menke, and J. P Pezier 14. An lnside View: Analyzing lnvestment Strategies . 299 R. E Egger and M. M. Menke 15. Managing the Corporate Business Portfolio 309 l. E. Matheson Research and Development 16. Overview of R&D Decision Analysis . 327 l. E. Matheson 17. Using Decision Analysis to Determine R&D's Value . .. .331 Article from lnside R&D 18. Selecting Projects to Obtain a Balanced Research Portfolio . .337 D. L. Owen 19. CallingtheShotsin R&D . 363 H. U. Balthasar, R. A. A. Boschi, and M. M. Menke 20. Quantifying and Forecasting Exploratory Research Success 375 R. A. A. Boschi, H. U. Balthasar, and M. M. Menke 21 . EvaluatingBasicResearchStrategies.. .... .. 385 M. M. Menke, J. Celzer, and J. P Pezier Social Policy 22. Social Decision Analysis . 401 R. A. Howard 23. The Decision to Seed Hurricanes . .417 R. A. Howard, J. E. Matheson, and D. W North 24. Decision Analysis of the synthetic Fuels Commercialization program . 435 S. N. Tani 25. Decision Analysis of Space Projects: Voyager Mars 445 l. E. Matheson and W J. Roths VOLUME ll: PROFESSIONAT COTLECTION foreword. o . ...vll What is Decision Analysis? .. ...viii HEALTH AND SAFETY . .477 Preface.... .479 26. On Making Life and Death Decisions . .481 R. A. Howard 27. The Value of Life and Nuclear Design . 507 D. L. Owen, J. E. Matheson, and R. A. Howard 28. The Design of H azardous Products. i ....521 D. L. Owen 29. On Being Environmentally Decisive . .529 P A. &ven and S. B. Engle 30. On Fates Comparable to Death . ....545 R. A. Howard PROFESSIONAL PRACTICE 575 Preface o . 577 31. The Foundations of Decision Analysis . 579 R. A. Howard 32. The Difficu lty of Assessing U ncertainty .591 E. C. Capen 33. Probability Encoding in Decision Analysis .601 C.5. Spetzler and C.5. Staeil von Holstein 34. Risk Preference .627 R. A. Howard 35. The Development of a Corporate Risk Policy for Capital lnvestment Decisions .665 C. S. Spetzler 36. The Used Car Buyer . 689 R. A. Howard 37. lnfluence Diagrams . .719 R. A. Howard and l. E. Matheson 38. The Use of lnfluence Diagrams in Structuring Complex Decision Problems . , .763 D. L. Owen TECH N ICAL CONTRI BUTIONS .oo...773 Preface . o . ....,.775 39. lnformation Value Theory . .777 R. A. Howard 40. Valueof Information Lotteries .......... ... 785 R. A. Howard 41 . The Economic Value of Analysis and Computation . 795 l. E. Matheson 42. Competitive Bidding in High-Risk Situations . 805 E. C. Capen, R. V Clapp, and W M. Campbell 43. Decision Analysis: Perspectives on lnference, Decision, and Experimentation . .821 R. A. Howard 44. Bayesian Decision Models for Systems Engineering . .835 R. A. Howard 4s.Proximal Decision Analysis . 843 R. A. Howard 46. Risk-Sensitive Markov Decision Processes . 881 R. A. Howard CONTRI BUTIONS FROM PSYCHOLOGY 897 Preface .. .... 899 47. Judgment Under Uncertainty: Heuristics and Biases. 901 A. Tversky and D. lQhneman 48. Prospect Theory: An Analysis of Decision Under Risk 911 D. khneman and A. Tversky 49. The Framing of Decisions and the Psychology of Choice 943 A. Tversky and D. lGhneman List of Theses in Decision Analysis at Stanford University . .951 F ORE I.IOR D Since the term "Decision Ana'lysis" was coined in 1963 (see paper #4), both its theory and practice have developed profusely. Stanford University has been a center for the intellectual development of decision analysis and the catalyst for its extensive applicat'ion. Consultants associated with Stanford, many of ffem graduates of the Engineering-Economic Systems Department, have accumulated hundreds of man-years of experience. This collection is intended to portray the "Stanford School of Decision Analysis," as viewed by the editors. Because the Stanford decision analysis community has the broadest base of practical experience, we believe these papers represent the most successful methods of dea'ling with decision problems. !{e have not attempted to represent alternative approaches or to enter into any debate of their relative merits. !{e have, however, included a few papers from other fields, notably psychology, that have had, and are having, a Significant impact on the practice of decision analysis. In these two volumes, h,e have collected papers on both tlre theory and app'lication of decision analysis. Although most of these readings have been published elsewhere, we have added a few unpublished papers to represent recent developments.* The first volurne is desiged to be accessible to a general readership and contains introductory papers and descriptions of actual applications. Appl ications to corporate strategic decisions are necessari ly disguised and underrepresented because of their proprietary nature. The second volurne is designed for the professional student of decision analysis. In addition to containing professional and technical papers, it contains some papers discussing recent developments in methodology for approaching health and safety problems. tlhile papers in this volume use tedtnical termino'logy, many of their ideas will be understandable to anyone. * t{here possible, we have indicated auUrors' current affiliations on the title page of each paper. Affiliation references appearing within the text are taken from the original publication and, therefore, ffidy vary from those on the title pages. vlraa WHAT IS DECISION ANALYSIS? When this nationally syndicated cartoon appeared in 1982, decision analysis had clearly become a common term. In common usage, however, the term has I ost prec i s i on. By decision analysiS, we mean a d i sc i pl ine -compFTs i ng the ph i I osophy, theotry, methodol ogy, and profess i onal practi ce necessary to formalize the analysis of tt- - important decisions. Decision analysis includes procedures and methodology for assessing the real nature of a situation in which a dec i s i on mi ght be made, for capturi ng the essence of that situation in a formal but - transparent manner, for formal Iy the decision problem, 1982 lnc and O by NEA. q,r"*6t14- "solving" for providing insight and motivation the dec i s i on-makers and "Today, l'm going to tell you all you'll need to to know about 'decision analysis."' i rnpl ementers. Confus i ng the tool s of dec i s i on Reprinted by pcmission.@ le82 l{EA, Inc. analySiS with deCiSiOn analySiS itself has contributed to the loss of precision. Because uncertainty is at the heart of most perp'lexing decision problems, decision analysts frequently use specialized tools, such as decision tree techniques, to evaluate uncertain situations. unfortunately, many people, some of them educators, have confused dqgjtion ana'lysis with decision trees. This is like confusing surgery with the scalpel. Although decision tree techniques are extrEmely- - useful in solving problems where uncertainty is critical, in a rei'l decision analysis, most of the effort and creativity is focused on finding and formulating the correct problem and on interpreting the results rather than on performing computations. vraaa I I INTRODUCTION AND OVERVIEW P re face These papers describe the philosophy and nethodology of decision analysi s. "The Evo'lut'ion of Decis'ion Analysis" was written especially for this collection to show the progress in the field. It describes the continuing development of the decision analysis cycle and of the process for capturing the three elements of any decis'ion problem -- values, alternatives, and i nf ormation -- in forrnal, but practical, dec'ision models. 'rAn Introduction to Decis'ion Analysi s" extensively discusses the principles and practice of decision analysis and describes the original dec'ision analysis cycle, which was updated in the previous paper. "Decis'ion Analysis in Systems Engineering," originally presented as a lecture, provides a non-techn'ical discussion of the basic principles and technigues developed from them. The paper discusses the nature of decisions, the relation of rational decision-making to mental health, and its applications to medical and social decisions. It also includes a transcript of a guestion period with some interesting exchanges.
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