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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

• Using risk to guide decision-making under uncertainty

• NWHA Annual Conference

• February 2014

xkcd.com

Darin E. Johnson

BIS Consulting

• 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

Option 1looks better by \$3 million…

…but there is still a lot of uncertainty.

• 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

• 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.

• 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.

• 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.