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Sensitivity analysis

Sensitivity analysis. Finds most important issues that matter in a decision Helps develop requisite model (a model that addresses all issues that matter most) Tools for sensitivity analysis

aladdin-davidson
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Sensitivity analysis

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  1. Sensitivity analysis • Finds most important issues that matter in a decision • Helps develop requisite model (a model that addresses all issues that matter most) • Tools for sensitivity analysis • One-way sensitivity analysis: examines effect of variables on consequences by considering one variable at a time. Tornado diagrams. • Two-way sensitivity analysis: examines effect of changes of two variables on consequences. Two-way sensitivity graph showing regions in which each strategy is optimum in the space of the two variables. • Sensitivity to probabilities of uncertain events. Two-way sensitivity graph showing regions in which each strategy is optimum in the space of two probabilities.

  2. Decision process Update model Further analysis needed? Y N Implement decision

  3. Decision about purchasing new airplane Hours flown Capacity of scheduled flights Operating cost Proportion of charter flights Insurance Charter price Total cost Revenue Price Finance cost Interest rate Ticket price Profit Proportion financed Purchase

  4. Influence diagram for studying sensitivity to probabilities Capacity of scheduled flights Operating cost Hours flown Proportion of charter flights Insurance Charter price Total cost Revenue Price Finance cost Interest rate Ticket price Profit Proportion financed Purchase

  5. Decision tree Consequence Hours flown Capacity sch. fl. 650, r -$9,725 45% Operating cost 900, 1-r q -$4,225 $253 650, s p $6,525 55% 900, 1-s 1-q $18,275 650, r $675 45% Y Purchase? 900, 1-r $10,175 $237 q 650, s 1-p $16,925 55% 1-q 900, 1-s $32,675 N $4,200

  6. Decision tree after making assumptions Consequence Hours flown Capacity sch. fl. 650, r -$9,725 45% Operating cost 900, 1-r q -$4,225 $253 650, 0.8r 0.5 $6,525 55% 900, 1-0.8r 1-q $18,275 650, r $675 45% Y Purchase? 900, 1-r $10,175 $237 q 650, 0.8r 0.5 $16,925 55% 900, 1-0.8r 1-q $32,675 N $4,200

  7. Two-way sensitivity graph Inv. Money Market Buy airplane B A A: uncertainty in probabilities p and q does not affect decision: buy airplane is the best decision B: decision is sensitive to probabilities p and q

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