Analysis of Decisions and RisksBuilding DesignIllustrative Purposes OnlyDecision Elementsof Sustainable Btains Hypothetical Data for Decision ElementsDecision and Risk Analysis IntuitionEtdVlDiiMkis and Methods oPresentation ContExpected Value Decision MakingConflicts of Interest and IncentivesE 115/215 GoalsExpected Utility Decision MakingChachere– CEE© John CPriorConstraints,CommitmentsA Decision Frame Sets Analytic RangeBuilding DesignIllustrative Purposes OnlyCo t e tsExample: SU will consider building a dorm, but not tkof Sustainable Btains Hypothetical Data for an amusement park, because the charter wouldn’t allow oneDecision Frames and Methods oPresentation ContDecision FrameFocus Analytic Resources HereE 115/215 GoalsHereExample: Should SU build the Baseline Green Dorm, or the Living Lab?Chachere– CEELiving Lab?Details Too Small to AddressExample: Don’t spend time choosing carpet colors,© John Cpp gp,because SU might not want carpet at all!Decisions Require a Balanced BasisDii Bih 3 tBuilding DesignIllustrative Purposes OnlyDecision Basis has 3 parts:1Alt tiof Sustainable Btains Hypothetical Data for 1.Alternatives (Options)2Information(A l )s and Methods oPresentation Cont2.Information (Analyses)3Preferences(Preferences)E 115/215 Goals3.Preferences (Preferences)Also need aDecision Rule,Chachere– CEEAlso need a Decision Rule, such as MACDADI, Decision © John CAnalysis, voting, bargaining, …Analysis of Decisions and RisksBuilding DesignIllustrative Purposes OnlyDecision Elementsof Sustainable Btains Hypothetical Data for Decision ElementsDecision and Risk Analysis IntuitionEtdVlDiiMkis and Methods oPresentation ContExpected Value Decision MakingConflicts of Interest and IncentivesE 115/215 GoalsExpected Utility Decision MakingChachere– CEE© John CIntuition for Decision AnalysisBuilding DesignIllustrative Purposes OnlyDecision Analysis (DA)isapplied Decision Theory;of Sustainable Btains Hypothetical Data for is applied Decision Theory; a Structured Conversation s and Methods oPresentation Contleading to Clarity of ActionE 115/215 GoalsÆ “DA” is appropriate only if a conversation is possible andChachere– CEEconversation is possible and clarity is needed© John CUncertainty Makes Decisions ComplexHMhT dPfiMk S ?Building DesignIllustrative Purposes OnlyHow Much Tornado-ProofingMakes Sense?of Sustainable Btains Hypothetical Data for s and Methods oPresentation ContE 115/215 GoalsChachere– CEE© John CIntuition for Risk AnalysisfHi h M it d Ri karn)arn)Building DesignIllustrative Purposes OnlyMagnitude of a risk = eventHigh Magnitude Riskskwalls)uakewalls)uclear Wao decisionuclear Wao decisionof Sustainable Btains Hypothetical Data for probability times consequenceequenceEth(shear wEarthqu(shear wNu(noNu(nos and Methods oPresentation ContConseImportance of risk for a decision =Price Escalation(minimize steel)Price Escalation(minimize steel)E 115/215 GoalsProbabilityLow Magnitude RisksEffect on risk magnitude()()Chachere– CEEOften Important: Soil Conditions, Weather, Earthquakes Defects Real Estate Marketyg© John CEarthquakes, Defects, Real Estate Market …Rarely Important: Nuclear War (can’t act on the risk), labor rates (don’t change much)…Analysis of Decisions and RisksBuilding DesignIllustrative Purposes OnlyDecision Elementsof Sustainable Btains Hypothetical Data for Decision ElementsDecision and Risk Analysis IntuitionEtdVlDiiMkis and Methods oPresentation ContExpected Value Decision MakingConflicts of Interest and IncentivesE 115/215 GoalsExpected Utility Decision MakingChachere– CEE© John CEx: Structural Decision Using Expected ValueHlfitki hBuilding DesignIllustrative Purposes OnlyReinforcedSteelHow can a large, profit-seeking company choose between these structural design options?of Sustainable Btains Hypothetical Data for ReinforcedConcreteSteelSteel is Cheap 50% (Heads)$30M$30Mprofits and Methods oPresentation Cont$10M$10Mprofit100%50% (Heads)Steel is Eiprofit$0ME 115/215 GoalsFormal Method 1:Maximize Expected Value(Average Result)Expensive50%(Tails)profitChachere– CEEMaximize Expected Value(Average Result)= Sum (probabilities times outcomes)© John CEV(Profit | Steel) =$30M x 0.50 + $0M x 0.50 = $15MEV(Profit | Concrete) = $10M x 1.00 = $10MAnalysis of Decisions and RisksBuilding DesignIllustrative Purposes OnlyDecision Elementsof Sustainable Btains Hypothetical Data for Decision ElementsDecision and Risk Analysis IntuitionEtdVlDiiMkis and Methods oPresentation ContExpected Value Decision MakingConflicts of Interest and IncentivesE 115/215 GoalsExpected Utility Decision MakingChachere– CEE© John CGetting the Team to Decide Well is ComplexHo can the compan ens re emplo eesBuilding DesignIllustrative Purposes OnlyHow can the company ensure employees make the best choices (e.g., Steel)?of Sustainable Btains Hypothetical Data for Managers have differing payoffs from the company, “conflicts of interest” (liti lfdi t ls and Methods oPresentation Cont(e.g, politics, self-aggrandizement, personal aesthetic views)E 115/215 GoalsThis classic challenge is known as a “Principal -Agent” problem.Chachere– CEEA common solution: try to “align incentives” to share the benefits of success© John CWhat if your incentive for the structural decision was 10% of profit?Best Decision Depends on IndividualBuilding DesignIllustrative Purposes Onlyof Sustainable Btains Hypothetical Data for 50% (Heads)$3M100%$1Ms and Methods oPresentation ContWhat if your incentive fthttl50%(Tails)$0M100%$1ME 115/215 Goalsfor the structural decision was 10% of profit?Chachere– CEEprofit?What if you were a billionaire?© John CEV(Income | Steel) =$3M x 0.50 + $0M x 0.50 = $1.5MEV(Income | Concrete) = $1M x 1.00 = $1MAnalysis of Decisions and RisksBuilding DesignIllustrative Purposes OnlyDecision Elementsof Sustainable Btains Hypothetical Data for Decision ElementsDecision and Risk Analysis IntuitionEtdVlDiiMkis and Methods oPresentation ContExpected Value Decision MakingConflicts of Interest and IncentivesE 115/215 GoalsExpected Utility Decision MakingChachere– CEE© John CEx: Structural Decision Using Expected UtilityT f ll l d i i ith “hi h i k ”Building DesignIllustrative Purposes OnlyTo formally analyze decisions with “high risk,” assess each outcome’s utility (usefulness)of Sustainable Btains Hypothetical Data for Formal Method 2:Maximize Expected Utility (Avg. Satisfaction)s and Methods oPresentation Cont= Sum (probabilities times