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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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The value of information
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
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
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
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
What are the sources of our uncertainty?

  • Construction cost estimates

  • Performance of units - future water and dispatch.

  • Failure rates and consequences.

  • Energy prices.

  • License, regulation.

  • Fish passage.

  • Others?

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


What if we collect more information
What if we collect more information?

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
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
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.



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