The Value of Information

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# The Value of Information - PowerPoint PPT Presentation

The Value of Information. Using risk to guide decision-making under uncertainty NWHA Annual Conference February 2014. xkcd.com. Darin E. Johnson BIS Consulting. Problem summary. Upgrade of a hydro-generation facility. Two-unit plant with space for a third.

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Presentation Transcript
The Value of Information
• Using risk to guide decision-making under uncertainty
• NWHA Annual Conference
• February 2014

xkcd.com

Darin E. Johnson

BIS Consulting

Problem summary
• Upgrade of a hydro-generation facility. Two-unit plant with space for a third.
• Option 1 – upgrade the existing units.
• Option 2 – upgrade existing and install a third, smaller unit
Initial results of the economic analysis

Option 1looks better by \$3 million…

…but there is still a lot of uncertainty.

Another way to look at it
• Overlap of the curves represents the “cost to reject” an option.
• The risk that we will regret selecting one option.
• Cost to reject Option 2 - \$4.6 million.

\$4.6 million risk

What are the sources of our uncertainty?
• Construction cost estimates
• Performance of units - future water and dispatch.
• Failure rates and consequences.
• Energy prices.
• Fish passage.
• Others?

Some of these we can improve, others we can’t

What we expect to happen:

• Curve narrows, but stays in the same location.

What might happen:

• Curve narrows and moves to the right. We now prefer Option 2

Solution?:

• Look at all possibilities; weight them.
Here is where we see the value of information
• Where we are now…
• Option 1 looks better, but there is a lot of overlap.
• Risk from rejecting worse option: \$4.6 million.
• Where we could be…
• We do some work to reduce uncertainty for one or both options.
• Risk is reduced – in this example, to \$1.7 million.

If we can do this work for less than \$2.9 million, it is worthwhile.

What can we take away from this?
• As always, spending decisions should be based on whether benefits exceed costs.
• Develop a problem statement and put it in a cost/benefit framework as soon as possible.
• Don’t worry if you’re uncertain. Focus on bounding your uncertainty – ask experts for maximum and minimum values.
• Remember – information is a means to an end.
• Compare the decision you would make today with the range of decisions you might make if you had better information.
• Pursue further information only if it reduces cost.