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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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