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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

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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
    • 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.
decision process
Decision process

Update model

Further analysis needed?

Y

N

Implement decision

decision about purchasing new airplane
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

influence diagram for studying sensitivity to probabilities
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

decision tree
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

slide6

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

two way sensitivity graph
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