Cover page

Table of Contents

Wiley Handbooks in OPERATIONS RESEARCH AND MANAGEMENT SCIENCE

Title page

Copyright page

List of Figures

List of Tables

Foreword

This Handbook Is Timely

Decision Professionals: The Practitioner Perspective

Our Profession

The Biggest Challenge

Preface

Acknowledgments

Special Acknowledgments

Individual Acknowledgments

Chapter Acknowledgments

Handbook Chapter Reviewers

About the Authors

Acronyms

Chapter One: Introduction to Decision Analysis

1.1 Introduction

1.2 Decision Analysis Is a Socio-Technical Process

1.3 Decision Analysis Applications

1.4 Decision Analysis Practitioners and Professionals

1.5 Handbook Overview and Illustrative Examples

1.6 Summary

KEY TERMS

Chapter Two: Decision-Making Challenges

2.1 Introduction

2.2 Human Decision Making

2.3 Decision-Making Challenges

2.4 Organizational Decision Processes

2.5 Credible Problem Domain Knowledge

2.6 Behavioral Decision Analysis Insights

2.7 Two Anecdotes: Long-Term Success and a Temporary Success of Supporting the Human Decision-Making Process

2.8 Setting the Human Decision-Making Context for the Illustrative Example Problems

2.9 Summary

KEY TERMS

Chapter Three: Foundations of Decision Analysis

3.1 Introduction

3.2 Brief History of the Foundations of Decision Analysis

3.3 Five Rules: Theoretical Foundation of Decision Analysis

3.4 Scope of Decision Analysis

3.5 Taxonomy of Decision Analysis Practice

3.6 Value-Focused Thinking

3.7 Summary

KEY TERMS

ACKNOWLEDGMENTS

Chapter Four: Decision Analysis Soft Skills

4.1 Introduction

4.2 Thinking Strategically

4.3 Leading Decision Analysis Teams

4.4 Managing Decision Analysis Projects

4.5 Researching

4.6 Interviewing Individuals

4.7 Conducting Surveys

4.8 Facilitating Groups

4.9 Aggregating across Experts

4.10 Communicating Analysis Insights

4.11 Summary

KEY TERMS

Chapter Five: Use the Appropriate Decision Process

5.1 Introduction

5.2 What Is a Good Decision?

5.3 Selecting the Appropriate Decision Process

5.4 Decision Processes in Illustrative Examples

5.5 Organizational Decision Quality

5.6 Decision Maker’s Bill of Rights

5.7 Summary

KEY TERMS

Chapter Six: Frame the Decision Opportunity

6.1 Introduction

6.2 Declaring a Decision

6.3 What Is a Good Decision Frame?

6.4 Achieving a Good Decision Frame

6.5 Framing the Decision Opportunities for the Illustrative Examples

6.6 Summary

KEY TERMS

Chapter Seven: Craft the Decision Objectives and Value Measures

7.1 Introduction

7.2 Shareholder and Stakeholder Value

7.3 Challenges in Identifying Objectives

7.4 Identifying the Decision Objectives

7.5 The Financial or Cost Objective

7.6 Developing Value Measures

7.7 Structuring Multiple Objectives

7.8 Illustrative Examples

7.9 Summary

KEY TERMS

Chapter Eight: Design Creative Alternatives

8.1 Introduction

8.2 Characteristics of a Good Set of Alternatives

8.3 Obstacles to Creating a Good Set of Alternatives

8.4 The Expansive Phase of Creating Alternatives

8.5 The Reductive Phase of Creating Alternatives

8.6 Improving the Set of Alternatives

8.7 Illustrative Examples

8.8 Summary

KEY WORDS

Chapter Nine: Perform Deterministic Analysis and Develop Insights

9.1 Introduction

9.2 Planning the Model: Influence Diagrams

9.3 Spreadsheet Software as the Modeling Platform

9.4 Guidelines for Building a Spreadsheet Decision Model

9.5 Organization of a Spreadsheet Decision Model

9.6 Spreadsheet Model for the RNAS Illustrative Example

9.7 Debugging the Model

9.8 Deterministic Analysis

9.9 Deterministic Modeling Using Monetary Multidimensional Value Functions (Approach 1B)

9.10 Deterministic Modeling Using Nonmonetary Multidimensional Value Functions (Approach 1A)

9.11 Illustrative Examples

9.12 Summary

KEY TERMS

Chapter Ten: Quantify Uncertainty

10.1 Introduction

10.2 Structure the Problem in an Influence Diagram

10.3 Elicit and Document Assessments

10.4 Illustrative Examples

10.5 Summary

KEY TERMS

Chapter Eleven: Perform Probabilistic Analysis and Identify Insights

11.1 Introduction

11.2 Exploration of Uncertainty: Decision Trees and Simulation

11.3 The Value Dialogue

11.4 Risk Attitude

11.5 Illustrative Examples

11.6 Summary

KEY TERMS

Chapter Twelve: Portfolio Resource Allocation

12.1 Introduction to Portfolio Decision Analysis

12.2 Socio-Technical Challenges with Portfolio Decision Analysis

12.3 Single Objective Portfolio Analysis with Resource Constraints

12.4 Multiobjective Portfolio Analysis with Resource Constraints

12.5 Summary

KEY TERMS

Chapter Thirteen: Communicating with Decision Makers and Stakeholders

13.1 Introduction

13.2 Determining Communication Objectives

13.3 Communicating with Senior Leaders

13.4 Communicating Decision Analysis Results

13.5 Communicating Insights in the Illustrative Examples

13.6 Summary

KEY TERMS

Chapter Fourteen: Enable Decision Implementation

14.1 Introduction

14.2 Barriers to Involving Decision Implementers

14.3 Involving Decision Implementers in the Decision Process

14.4 Using Decision Analysis for Decision and Strategy Implementation

14.5 Illustrative Examples

14.6 Summary

KEY TERM

Chapter Fifteen: Summary of Major Themes

15.1 Overview

15.2 Decision Analysis Helps Answer Important Decision-Making Questions

15.3 The Purpose of Decision Analysis Is to Create Value for Shareholders and Stakeholders

15.4 Decision Analysis Is a Socio-Technical Process

15.5 Decision Analysts Need Decision-Making Knowledge and Soft Skills

15.6 The Decision Analysis Process Must Be Tailored to the Decision and the Organization

15.7 Decision Analysis Offers Powerful Analytic Tools to Support Decision Making

15.8 Conclusion

Appendix A Probability Theory

A.1 Introduction

A.2 Distinctions and the Clarity Test

A.3 Possibility Tree Representation of a Distinction

A.4 Probability as an Expression of Degree of Belief

A.5 Inferential Notation

A.6 Multiple Distinctions

A.7 Joint, Conditional, and Marginal Probabilities

A.8 Calculating Joint Probabilities

A.9 Dependent and Independent Probabilities

A.10 Reversing Conditional Probabilities: Bayes’ Rule

A.11 Probability Distributions

A.12 Combining Uncertain Quantities

Appendix B Influence Diagrams

B.1 Introduction

B.2 Influence Diagram Elements

B.3 Influence Diagram Rules

B.4 SUMMARY

Appendix C Decision Conferencing

C.1 Introduction

C.2 Conference Process and Format

C.3 Location, Facilities, and Equipment

C.4 Use of Group Processes

C.5 Advantages and Disadvantages

C.6 Best Practices

C.7 SUMMARY

KEY TERMS

Index

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Title page

List of Figures

FIGURE 1.1 Decision analysis process
FIGURE 2.1 Dimensions of decision complexity
FIGURE 3.1 The scope of decision analysis
FIGURE 3.2 A taxonomy of decision analysis practice
FIGURE 3.3 Single objective decision analysis
FIGURE 3.4 Two approaches to multiple objective decision analysis
FIGURE 3.5 Example of indifference curves
FIGURE 3.6 Benefits of value-focused thinking
FIGURE 4.1 Divergent and convergent thinking
FIGURE 5.1 Six elements of decision quality
FIGURE 5.2 Suggested prescription for resolving decisions
FIGURE 5.3 The dialogue decision process
FIGURE 5.4 The decision analysis cycle
FIGURE 5.5 Systems decision process
FIGURE 5.6 Strictly analytical process
FIGURE 5.7 Advocacy process
FIGURE 5.8 The Geneptin dialogue decision process
FIGURE 6.1 Example vision statement
FIGURE 6.2 Format of the decision hierarchy
FIGURE 6.3 RNAS decision hierarchy
FIGURE 6.4 Geneptin decision hierarchy
FIGURE 6.5 Data center location decision hierarchy
FIGURE 7.1 Objectives hierarchy for car purchase
FIGURE 7.2 Functional value hierarchy for car purchase
FIGURE 7.3 Comparison of objectives and functional objectives hierarchy
FIGURE 7.4 RNAS means–ends objectives hierarchy
FIGURE 7.5 Data center functional value hierarchy
FIGURE 8.1 Example strategy table
FIGURE 8.2 Defining two alternatives in a strategy table
FIGURE 8.3 Nested strategy tables
FIGURE 8.4 RNAS strategy table
FIGURE 8.5 Geneptin strategy table
FIGURE 9.1 Example influence diagram
FIGURE 9.2 Example of an Input Table
FIGURE 9.3 RNAS cash flow by business unit
FIGURE 9.4 Example of a sources of value waterfall chart
FIGURE 9.5 Waterfall chart of difference in value between alternatives
FIGURE 9.6 Example value components chart
FIGURE 9.7 Example of a tornado diagram
FIGURE 9.8 Example of a difference tornado diagram
FIGURE 9.9 Four types of value functions for increasing value
FIGURE 9.10 Geneptin influence diagram
FIGURE 9.11 Geneptin drill-down ID for market share
FIGURE 9.12 Geneptin tornado diagram
FIGURE 9.13 Data center location functional value hierarchy
FIGURE 9.14 Data center value components chart
FIGURE 9.15 Data center cost versus value plot
FIGURE 9.16 Data center waterfall chart
FIGURE 9.17 Data center sensitivity analysis for latency unnormalized swing weight without change in preferred alternative
FIGURE 9.18 Data center latency swing weight sensitivity with change in the preferred alternative
FIGURE 10.1 Roughneck ID fragment: decisions
FIGURE 10.2 Roughneck ID fragment with decisions and objectives
FIGURE 10.3 RNAS ID fragment with decisions, win-scenario variables, and value node
FIGURE 10.4 RNAS ID fragment with predecessors of NPV Cash Flow
FIGURE 10.5 RNAS ID fragment with predecessors of Investment/Divestment proceeds
FIGURE 10.6 Restaurant ID fragments
FIGURE 10.7 Complete RNAS influence diagram
FIGURE 10.8 Probability wheel
FIGURE 10.9 Expert assessment template
FIGURE 10.10 RNAS documentation of oil price assessment
FIGURE 11.1 Influence diagram for capacity planning example
FIGURE 11.2 Schematic decision tree for capacity planning example
FIGURE 11.3 Partial display of evaluated decision tree for capacity planning example
FIGURE 11.4 Extended Swanson–Megill and Brown–Johnson distributions
FIGURE 11.5 RNAS E&P profit and loss statement—growth strategy
FIGURE 11.6 RNAS value components chart
FIGURE 11.7 RNAS value components, as compared with the Growth strategy
FIGURE 11.8 RNAS EV cash flows
FIGURE 11.9 RNAS direct tornado diagrams
FIGURE 11.10   Direct and delta tornado diagrams for team hybrid and divest hybrid
FIGURE 11.11 One-way sensitivity analysis of RNAS hybrid strategies to Gas Price
FIGURE 11.12 Calculating value of clairvoyance on royalty in capacity planning example
FIGURE 11.13 Tar sands tornado diagram
FIGURE 11.14 Tar sands construction threshold exploits optionality
FIGURE 11.15 RNAS S-curves
FIGURE 11.16 Tar sands value-risk profiles
FIGURE 11.17 Flying bars chart for RNAS strategies
FIGURE 11.18 Assessing risk tolerance
FIGURE 11.19 EV and CE versus size of deal
FIGURE 11.20 Geneptin flying bar chart
FIGURE 11.21 Geneptin waterfall chart
FIGURE 12.1 RNAS investment efficiency curve
FIGURE 12.2 RNAS E&P production
FIGURE 12.3 Funding areas and levels
FIGURE 12.4 One possible portfolio
FIGURE 12.5 Benefit vs. cost plot of one possible portfolio
FIGURE 12.6 Trade space of portfolios
FIGURE 12.7 Selected portfolio for Cost C, better portfolio for same Cost (X), cheaper portfolio with same benefit (Y)
FIGURE 12.8 Curve with decreasing slope
FIGURE 12.9 Curve with varying slope
FIGURE 12.10 Combination of levels for curve with varying slope
FIGURE 12.11 Trade space of data center projects
FIGURE 12.12 Data for applications projects
FIGURE 12.13 B/C for applications projects
FIGURE 12.14 Efficient frontier for the data center
FIGURE 13.1 Communication
FIGURE 13.2 Decision analysis participants and communications paths
FIGURE 13.3 Communicating with senior leaders
FIGURE 13.4 Chart used to tell the story of the best technology
FIGURE 13.5 Tar sands decision tree
FIGURE 13.6 Data center cost versus value plot
FIGURE 14.1 LNG plant completion date tornado diagram
FIGURE 14.2 Plot of IA value versus life cycle phase
FIGURE 14.3 Base practices causing the IMS schedule delay
FIGURE A.1 Possibility tree
FIGURE A.2 Possibility tree with two distinctions
FIGURE A.3 Probability tree with two distinctions
FIGURE A.4 Reversing the order of a tree
FIGURE A.5 Probability distribution as a histogram
FIGURE A.6 Probability distribution in cumulative form
FIGURE A.7 Cumulative probability distribution of a discrete measure
FIGURE B.1 Elements of an influence diagram
FIGURE B.2 Types of influences
FIGURE B.3 Probabilities conditional on a decision and Howard canonical form
FIGURE C.1 The decision conferencing process

List of Tables

TABLE 1.1 List of Technical Products and Soft Skills
TABLE 1.2 Comparison of Three Decision Analysis Application Areas
TABLE 1.3 Section Location of Illustrative Examples in Each Chapter
TABLE 2.1 Techniques for Stakeholder Analysis
TABLE 4.1 Advantages and Disadvantages of Surveys
TABLE 5.1 Fitting the Process to the Decision
TABLE 6.1 Concern List by Stakeholder
TABLE 6.2 Stakeholder Issue Identification Matrix
TABLE 7.1 Preference for Types of Value Measure
TABLE 8.1 Strategy Table in Matrix Format
TABLE 8.2 Data Center Strategy Generation Table
TABLE 9.1 Deterministic Results for Manufacturing Technology Example
TABLE 9.2 Overall Value Metric for Manufacturing Technology Example
TABLE 9.3 The Elements of the Swing Weight Matrix
TABLE 9.4 Data Center Single-Dimensional Value Functions
TABLE 9.5 Data Center Swing Weight Matrix
TABLE 9.6 Data Center Scores on Each Value Measure
TABLE 9.7 Data Center Single-Dimensional Value Calculations for Each Value Measure
TABLE 9.8 Data Center Normalized Swing Weights
TABLE 9.9 Data Center Weighted Value and Total Value Calculations
TABLE 9.10   Data Center Life Cycle Cost and Value for Each Alternative
TABLE 11.1 Optimal Downstream Decisions in Capacity Planning Example
TABLE 11.2 RNAS Value Components
TABLE 11.3 Two-Way Sensitivity Analysis of RNAS Hybrid Strategies to Gas Price and E&P Value
TABLE 12.1 RNAS Portfolio Metrics
TABLE 12.2 Projects Requesting Funding
TABLE 12.3 MODA Value Scales
TABLE 12.4 Values for Projects
TABLE 12.5 Project Order-of-Buy
TABLE 12.6 Best Portfolio for $450M
TABLE 13.1 Decision Team Communication Objectives and Stakeholder Objectives
TABLE 14.1 Decision Implementation Roles and Questions
TABLE A.1 Equalities When Combining Uncertain Quantities
TABLE C.1 Advantages and Disadvantages

Foreword

This handbook represents a significant advance for decision professionals. Written for practitioners by practitioners who respect the theoretical foundations of decision analysis, it provides a useful map of the tools and capabilities of effective practitioners. I anticipate that this and future editions will become the primary repository of the body of knowledge for practicing decision professionals.

This Handbook Is Timely

The practice of decision analysis (DA) is at a major inflection point. That high-quality decisions can generate immense value is being demonstrated again and again. Leaders of organizations are increasingly aware of how opportunities are lost by making “satisficing” decisions—that is, decisions that are “good enough.” The benefit-to-cost ratio of investing in better decisions is frequently a thousand to one. I know of no better opportunity for value creation anywhere. As Frank Koch,1 president of the Society of Decision Professionals (SDP), has said, “Benefit to cost ratios … are immense simply because the added cost of doing DA is negligible. We would still be paying the analysts and decision makers without DA; they would simply be talking about different things. The incremental cost of having a better, more relevant conversation is zero, so regardless of the benefit, the ratio is infinite! Even if I throw in the cost of training and learning some software, that’s measured in thousands and the benefits are clearly measured in millions.”

Why is this huge opportunity still a secret from most decision makers? It is because we humans are wired to believe that we are making good decisions even when we leave value on the table. We are wired to be satisfied with good enough. We shape our memories with hindsight and rationalization. The burgeoning set of literature from the behavioral decision sciences documents many of our biases and draws attention to the gap between true decision quality (DQ) (see Chapter 5) and our natural decision-making tendencies.

Our individual cognitive biases are amplified by social behavior, like groupthink. We assume that advocacy decision processes in use by most organizations produce good decisions, yet they are designed to suppress good alternatives. We assume that agreement is the same as DQ, yet we see a lot of agreement around nonsense. It is not uncommon to hear statements like, “I can’t believe it—what were we thinking?”

If DQ can create immense additional value in specific decisions, can we develop DQ as an organizational competence? The answer is yes, and Chevron has shown the way. Over the period in which it has implemented a deep and broad adoption of DQ, Chevron has outperformed its peer group of major oil companies in creating shareholder value. While many organizations have pockets of organizational decision quality (ODQ), to my knowledge, Chevron has the broadest and deepest adoption to date. And by “adoption,” I don’t just mean better analytics. All the major oil companies have the analytics to deal address uncertainties and risk. The difference is that the whole Chevron organization seems to be in passionate and collaborative pursuit of value creation based on quality decisions linked with effective execution. I believe that Chevron’s success is the beginning of a big wave of broad adoption of organizational DQ.2

The immense value left behind by our satisficing behaviors represents the biggest opportunity for our business and societal institutions in the coming decades. If we begin to think of these opportunity losses as an available resource, we will want to mine this immense value potential. The courts—led by the Delaware Supreme Court—are raising the bar in their interpretation of a board director’s duty of “good faith.” In the coming years, board and top management’s best defense is their documented practice of DQ.

Decision Professionals: The Practitioner Perspective

The Society of Decision Professionals3 states that the mission of decision professionals is to:

The role of a decision professional as a practitioner of DA and facilitator of organizational alignment is gaining acceptance. Dozens of organizations have established internal groups of professionals, designed career ladders, and developed specific competency requirements. The recently formed SDP has created a certification process and career ladder that specifies increasing competency levels for practitioners.

While there are important similarities between becoming a successful practitioner and becoming a tenured academic, there are also major differences. The decision professional is motivated by bringing clarity to complex decision situations and creating value potential in support of decision makers. He or she is less interested in the specialization required for peer-reviewed publication. Instead, the practitioner wants to acquire practical tools and relevant skills that include both analytical and facilitation skills (project management, conflict resolution, and other so-called “soft skills”).

The ability to address both organizational and analytical complexity (see Figure F.1) are of great importance to the practitioner. As I like to say, “If you can only deal with the analytical complexity, you can get the right answer—but nobody cares. If you can only facilitate in the face of organizational complexity, you can resolve conflicts and gain agreement—but it can be agreement around nonsense.” To bring full value, we need to deliver the combination—agreement around the best answer, the answer that generates the greatest value potential.

Figure F.1 Two dimensions of competence.

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Individual decision professionals can deliver this if we have the competency in both areas. However, many practitioners are significantly better in one or the other—either strong analytical capabilities or strong social/emotional intelligence and facilitation skills. Therefore, many practitioners find it best to team up with others to deliver the full value of DQ. To make such teaming effective, there must be mutual respect for the other competency and a recognition that value creation from the combination is the goal. It bears repeating: We need to gain alignment around the best answer—the answer that creates the greatest value potential.

As practitioners we are always approximating and simplifying. We are practical decision engineers and decision facilitators who want robust solutions that are effective in creating a lot of potential value. We are organizational facilitators who are not satisfied unless the best decision is owned by the decision makers and implementers. Incisiveness with tools that produce insight and processes that foster effective engagement are more important to us than another refinement to the axioms of normative decision theory. In my experience, the academic debates at the edges of decision science over the last two decades have contributed surprisingly little to the practice. Seldom is the primary challenge in solving real decision problems a matter of advanced theory.

Our goal should be to make our concepts and methods as simple and accessible as possible. As I am writing this, I am participating in a 2-week program to teach incoming high school freshmen the basics of decision quality and help them apply the concepts to significant school decision projects. I recommend that all decision professionals become engaged with spreading decision skills to youth4 for the simple reason that it will make one a better decision professional. Senior executives and ninth graders have about the same attention span (albeit for different reasons) and want to get to the essence simply and clearly. Even when we employ advanced tools, our results should always be made transparent.

Our Profession

What does it mean to be in a profession? A profession differs from a trade. In providing a professional service, we recognize that the customer cannot fully judge our service and must trust the integrity of the professional to act in the customer’s best interest—even when the customer does not wish to hear it. Our customers are the decision makers—the leaders of organizations. We have the responsibility to speak “truth to power.”

We also have the obligation to not “fake it.” Decision professionals must be able to recognize which tools are normative (that is consistent with the norms of decision theory) and which are not but may be useful in practice. We also have to recognize destructive or limited practices. A true decision professional avoids making claims that can be proven to violate the basic norms of decision theory.

As with the medical field, we have to protect our profession from quackery. The profession is beginning to step up to this challenge, taking measures to assure quality and certify competence. This is, of course, a sensitive area in a field that incorporates science, art, and engineering. While I recognize the risks of trying to come to agreement on a definition of decision competence, I support this trend fully and applaud the start that the Society of Decision Professionals has made.

The Biggest Challenge

In this nascent profession, our biggest challenge is to gain greater mindshare among decision makers. The fraction of important and complex decisions being made with the support of decision professionals is still very small. We can make faster progress if we unify our brand and naming conventions. I urge all practitioners to use a common language to make more headway with our audiences.

Here are my suggestions:

On behalf of the profession, I would like to express my gratitude to Greg Parnell, Steve Tani, Eric Johnson, and Terry Bresnick for creating this handbook. This handbook represents a valuable contribution to the practitioner community. I expect that it will be the first edition of many to come.

CARL SPETZLER

Notes

1Frank Koch in a written response to the question: What is the ROI of investing in DA based on your experience at Chevron? Frank Koch retired in 2010 after the Chevron team had been awarded the best practice award for 20 Years of DA at Chevron.

2See the SDG white paper, Chevron Overcomes the Biggest Bias of All (Carl Spetzler, 2011). Available from SDG website, http://www.sdg.com.

3See: http://www.decisionprofessionals.com

4Check out The Decision Education Foundation at http://www.decisioneducation.org.

Preface

Our Handbook of Decision Analysis is written for the decision professional. The target audience is the decision analysis practitioner who wants to increase the breadth and depth of his or her technical skills (concepts and mathematics) and soft skills (personal and interpersonal) required for success in our field. We assume the reader has a technical (engineering, science, mathematics, or operations research) or business degree; a course in probability and statistics (Appendix A provides a probability review); and, perhaps, some introduction to single or multiple objective decision analysis in a college course or a professional short course. The book is not designed to introduce new decision analysis mathematics, but rather to make the most common mathematics and best practices available to the practitioner.

The handbook is designed to be supplemental reading for professional decision analysis training courses, a reference for beginning and experienced practitioners, and a supplemental text for an undergraduate or graduate course in decision analysis. Decision analysts work in many industries and government agencies; many work in oil and gas firms, pharmaceutical firms, and military/intelligence agencies. The book should be useful to both domestic and international practitioners.

Our handbook describes the philosophy, technical concepts, mathematics, and art of decision analysis for the decision professional. The handbook includes chapters on the following topics: decision-making challenges; mathematical foundations of decision analysis; decision analysis soft skills; selecting the decision making process for interacting with decision makers and stakeholders; framing the decision; crafting decision objectives; designing creative alternatives to create value; performing deterministic modeling and analysis of alternatives; assessing uncertainty; performing probabilistic modeling and analysis; portfolio decision analysis; communicating with senior decision makers; and implementing decisions.

Figure P.1 provides the organizational structure of the book. Chapter 1 provides an introduction to decision analysis. Chapters 2–4 provide the foundational knowledge required for decision analysis success. Chapters 5–14 provide the decision analysis best practices to create value as sequential, iterative steps. However, the order of the steps should be tailored to the application, and some steps may not apply. For example, if the decision is a choice of the best alternative, the portfolio decision analysis chapter would not apply. Also, some steps can be combined. For example, the decision framing and crafting of the decision objectives may be done at the same time. Chapter 15 provides a summary of the major themes of the book. The chapters that provide the mathematics of decision analysis are outlined with dotted lines.

FIGURE P.1. Chapter organization of the Handbook Decision of Analysis.

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The book also includes key insights from decision analysis applications and behavioral decision analysis research. The handbook references decision analysis textbooks, technical books, and research papers for detailed mathematical proofs, advanced topics, and further professional reading.

The handbook has five unique features:

1. The book provides a balanced presentation of technical skills (decision analysis concepts, mathematics, and modeling) and soft skills (strategic thinking, leading teams, managing teams, researching, interviewing individuals, facilitating groups, and communicating).
2. The book integrates the techniques of single and multiple objective decision analysis instead of presenting them in separate sections of the book. Chapter 3 provides our framework.
3. The book uses three substantive illustrative examples (Roughneck North American Strategy, Geneptin Personalized Medicine, and Data Center) to illustrate the key decision analysis concepts and techniques, show the diversity of applications, and demonstrate how the techniques are tailored to different decision problems.
4. The book presents multiple qualitative and quantitative techniques for each key decision analysis task as opposed to presenting one technique for all problems. After describing the techniques, we discuss their advantages and disadvantages.
5. Supplementary material for this book can be found by entering ISBN 9781118173138 at booksupport.wiley.com. This website will contain information on the book and the Microsoft® Office Excel® files used for the three illustrative examples.

We, the coauthors, became decision analysts and strive to be decision professionals because we believe in the power of decision analysis to create value for organizations and enterprises. The art and science of decision analysis has changed our professional and personal decision making.

Writing the handbook has been a great opportunity for us to reflect on what we have learned and to describe the best practices that we use. In addition to our mentors and colleagues, we have also learned a lot from each other in the process of writing (and rewriting) this book! We look forward to hearing your comments on the handbook, and we hope that the material helps your development as a decision professional.

GREGORY S. PARNELL
TERRY A. BRESNICK
STEVEN N. TANI
ERIC R. JOHNSON

Acknowledgments

We have benefited greatly from our decision analysis colleagues and mentors. We would like to acknowledge these contributions in four categories: special, individual, chapter, and handbook reviewers.

Special Acknowledgments

The authors of this book wish to express our deep appreciation to Professor Ronald A. Howard for being our teacher, mentor, and colleague. All four of us studied under Ron at Stanford, and he inspired each of us to pursue a career as a decision professional. His formulation of decision analysis is the basis of our understanding of how to address tough decisions, and his ongoing contributions to the field have strengthened our professional practice.

In addition, the authors appreciate the support of the John Wiley & Sons OR/MS series editor Susanne Steitz-Filler, our colleagues on the board of the Society for Decision Professionals, and the anonymous Wiley OR/MS reviewers who all encouraged us to write a decision analysis handbook for decision professionals.

Individual Acknowledgments

Gregory S. Parnell acknowledges colleagues Dennis Buede, Pat Driscoll, Ralph Keeney, Robin Keller, Craig Kirkwood, and Larry Phillips for their valuable professional advice and friendship. In addition, I acknowledge Terry Bresnick for recruiting me to Innovative Decisions, Inc., which has involved me in decision analysis practice as well as education.

Terry A. Bresnick acknowledges Ed Sondik and Rex Brown for providing DA theoretical background; Cameron Peterson, Roy Gulick, and Larry Phillips for making me understand the importance of the “socio” side of decision analysis and molding my perspective on facilitation; Al Grum for being my mentor as I started my career as a decision analyst; and Dennis Buede for being my collaborator and partner for many years in our DA practice.

Eric R. Johnson acknowledges Leonard Bertrand and Jim Matheson for conversations that contributed to my perspective on decision analysis and to the handbook.

Steven N. Tani acknowledges Jim Matheson for providing vital leadership during the early years of the decision analysis profession at Stanford Research Institute and Carl Spetzler for keeping Strategic Decisions Group true to its values through many transitions in its 31-year history. Both of these colleagues have had a large and positive role in shaping my professional career.

Sean Xinghua Hu acknowledges colleague Stanhope Hopkins for refinement of some of the Geneptin case illustrations and key contribution to the development of the case Excel model.

Chapter Acknowledgments

CHAPTER 1 AND 4: SOFT SKILLS

The authors would like to acknowledge the instructors of the Soft Skills Workshops that has been taught at Institute for Operations Research and Management Science (INFORMS) and Military Operations Research Society (MORS). These individuals include Bill Klimack, Freeman Marvin, Jack Kloeber, Don Buckshaw, Dave Leonardi, and Paul Wicker. We have also benefited from discussions with colleagues at DAAG 2012, including Carl Spetzler. They have motivated us to provide explicit identification and description of soft skills that are essential for decision analysts. The identification methodology that includes personal and intrapersonal skills is our contribution to the field.

CHAPTER 2

The authors would like to acknowledge Dennis Buede and Freeman Marvin, our colleagues at Innovative Decisions, Inc. Dennis and Freeman have developed and co-taught courses on decision analysis, systems engineering, and facilitation. Their collaboration and insights have made this chapter more complete and more focused.

Handbook Chapter Reviewers

After drafting the entire book, we sent each chapter to one or two colleagues for review. We acknowledge the following individuals for their timely reviews and excellent suggestions: Ali Abbas, Ritesh Banerjee, Kevin Carpenter, Jim Chinnis, Ellen Coopersmith, Robin Dillon, Jim Felli, Dave Frye, Roy Guilick, Onder Guven, Ralph Keeney, Rob Kleinbaum, Jeff Keisler, Craig Kirkwood, Jack Kloeber, Ken Kuskey, Bill Klimack, Frank Koch, William Leaf-Herrmann, Pat Leach, Freeman Marvin, Dan Maxwell, Jason Merrick, Cam Peterson, Jan Schulze, Carl Spetzler, and Joe Tatman. Of course, any remaining errors or omission are the responsibility of the authors.

About the Authors

The handbook was written by the first four contributors. The primary authors of each chapter are on its title page; however, all four authors contributed to each chapter. The handbook has four illustrative examples; the Roughneck North American Strategy was written by Eric R. Johnson; the Geneptin was written by Sean Xinghua Hu; the Data Center Location written by Gregory S. Parnell; and the Data Center portfolio was written by Terry A. Bresnick.

Dr. GREGORY S. PARNELL is a professor of systems engineering at the U.S. Military Academy at West Point. His research focuses on decision and risk analysis for defense, intelligence, homeland security, and environmental applications. He has also taught at the U.S. Air Force Academy, Virginia Commonwealth University, and the Air Force Institute of Technology. He has taught over 60 1-week decision analysis professional courses for government and commercial clients. He has been Chairman of the Board and is a senior principal analyst with Innovative Decisions, Inc., a decision analysis consulting firm. Dr. Parnell is a former president of the Decision Analysis Society of the Institute for Operations Research and Management Science (INFORMS) and of the Military Operations Research Society (MORS). He has also served as editor of Journal of Military Operations Research. Dr. Parnell has published more than 100 papers and book chapters and has coedited Decision Making for Systems Engineering and Management, Wiley Series in Systems Engineering (2nd ed, John Wiley and Sons, 2011). He has received several professional awards, including the U.S. Army Dr. Wilbur B. Payne Memorial Award for Excellence in Analysis, MORS Clayton Thomas Laureate, two INFORMS Koopman Prizes, and the MORS Rist Prize. He is a Fellow of MORS, INFORMS, the International Committee for Systems Engineering, the Society for Decision Professionals, and the Lean Systems Society. He received his BS in Aerospace Engineering from the State University of New York at Buffalo, his ME in Industrial and Systems Engineering from the University of Florida, his MS in Systems Management from the University of Southern California, and his PhD in Engineering-economic Systems from Stanford University. Dr. Parnell is a retired Air Force Colonel and a graduate of the Industrial College of the Armed Forces.

Mr. TERRY A. BRESNICK is the cofounder and Senior Principal Analyst at Innovative Decisions, Inc. He has had extensive experience in applying decision analysis to complex problems of government and industry. Earlier, as an officer in the U.S. Army, and currently, as a consultant in the private sector, Mr. Bresnick has demonstrated his expertise in the areas of decision analysis, risk analysis, strategic planning, resource allocation and budgetary analysis, evaluation of competing alternatives, cost–benefit analysis, and business area analysis. He has facilitated more than 1,000 decision conferences and/or workshops for government and private sector clients. He has been an Assistant Professor of Systems and Decision Analysis at the U.S. Military Academy, is a certified Financial Planner, a Fellow of the Society of Decision Professionals, and a registered Professional Engineer in the State of Virginia. Mr. Bresnick was awarded the David Rist Prize by the Military Operations Research Society for his work on an innovative military application of decision analysis. He received a BS in Engineering from the U.S. Military Academy, an MBA in Decision Science from George Mason University, and an MS in Statistics and the Degree of Engineer in Engineering-Economic Systems from Stanford University. Mr. Bresnick is a retired Lieutenant Colonel in the U.S. Army.

Dr. ERIC R. JOHNSON has helped clients facing decision challenges throughout his career. This has included work through consultancies, as well as working within the client organization. He has extensive experience in pharmaceuticals and oil, gas, and electric utilities, having worked for Schering-Plough, Portland General Electric, Pharsight, and Decision Strategies, Inc. before taking his current position at Bristol-Myers Squibb. Dr. Johnson is a Fellow and Board member of the Society of Decision Professionals. He is a member of the Decision Analysis Society of INFORMS and won its Decision Analysis Best Practice award in 2002 for a decision analysis of development decisions for a drug codenamed Apimoxin. He has a BA in philosophy from Reed College and a PhD in Management Science and Engineering, focusing in decision analysis, from Stanford University.

Dr. STEVEN N. TANI has been a professional decision analyst since 1975. During his career, he has helped numerous clients in both the private and public sectors make good choices in difficult decision situations. He has also taught many courses in decision analysis and its application. He was manager of the Decision Analysis Executive Seminar Program for SRI International and serves as an instructor in the Strategic Decision and Risk Management program in Stanford University’s Center for Professional Development. Dr. Tani is a partner with Strategic Decisions Group (SDG), and in 2004 was named the first SDG Fellow. He is a Fellow in the Society of Decision Professionals and has served as a Board member for that organization. He holds a BS degree in Engineering Science and MS and PhD degrees in Engineering-Economic Systems, all from Stanford University.

Dr. SEAN XINGHUA HU is Head of Bionest USA and Managing Partner, North America at Bionest Partners, a global strategy/management consulting firm. He has been a decision analysis practitioner and professional decision analyst for many years. Dr. Hu joined the Life Sciences Division of Strategic Decisions Group (SDG) upon its acquisition by IMS Management Consulting in 2006 and served as its Leader of Personalized Medicine Strategy Consulting. A recognized thought leader in the field of personalized medicine strategy, Dr. Hu has been a pioneer in applying decision analysis framework and analytics to advising pharmaceutical and diagnostic industries in the development and commercialization of personalized medicine and optimization of related R&D and commercial decisions. Dr. Hu was the only representative from the management consulting industry to serve on the multiyear FDA Personalized Medicine Initiative Consortium, responsible for decision analysis/probabilistic modeling. This FDA Consortium effort led to the publication in Nature Reviews Drug Discovery (November 2011) a landmark article, of which Dr. Hu is a colead author, describing an analytical approach to evaluate personalized medicine R&D and commercialization strategic alternatives based on decision analysis concept. Among the several academia-oriented extracurricular appointments, Dr. Hu serves on the Editorial Board of the peer-reviewed journal Personalized Medicine. Dr. Hu holds a BS degree in Organic Chemistry from Peking University, China, a PhD in Genomics from New York University, and an MBA in Strategic and Entrepreneurial Management from the Wharton School, University of Pennsylvania.

Acronyms

AFT Alternative-Focused Thinking
BLUF Bottom Line Up Front
boe Barrel of oil-equivalent
BRAC Base realignment and closure
BTU British thermal units
BU Business Unit
capex Capital expenses
CBM Coalbed Methane
CE Certain Equivalent
CFO Chief Financial Officer
COTS Commercial off-the-shelf software
DA Decision Analysis
DAAG Decision Analysis Affinity Group
DEF Decision Education Foundation
DFT Decision Focused Transformation
DM Decision Maker
DoD Department of Defense
Dx Diagnostic
E&P Exploration and Production
EGFR Epidermal Growth Factor Receptor
EnP Exploration and Production
ENPV Expected Net Present Value
EOR Enhanced Oil Recovery
EV Expected Value
F&D Finding and Development
FDA Food and Drug Administration
FISH Fluorescent in situ hybridization
Gbps Gigabytes per second
GRASP Goals and Outcomes, Room and Logistics, Agenda and Time Available, Support Team, Tools, and Techniques, Participants and Observers
HER2 Human Epidermal Growth Factor Receptor 2
IC Intelligence Community
ID Influence Diagram
IDCF International Decision Conferencing Forum
IHC Immunohistochemistry
INFORMS    Institute for Operations Research and Management Science
IT Information Technology
KRAS v-Ki-ras2 Kirsten rat sarcoma viral oncogene homolog
LAV Light armored vehicle
LCC Life Cycle Cost
LDT Laboratory-Developed Test
mmBtu Million British thermal units
MODA Multiple Objective Decision Analysis
MPG Miles per gallon
MW Megawatts
NGT Nominal Group Technique
NPV Net Present Value
ODQ Organizational Decision Quality
opex Operating expenses
P&L Profit and Loss Statement
P0 0th percentile
P10 10th percentile
P100 100th percentile
P50 50th percentile
P90 90th percentile
PDORA Purpose, Desired Outcomes, Roles, and Agenda
PI Profitability Index
PnL Profit and Loss Statement
PTRS Probability of Technical and Regulatory Success
PV Present Value
R&D Research and development
RAM Randon access memory
RNAS Roughneck North American Strategy
ROM Read-only memory
SDP Society for Decision Professionals
SH Stakeholder
SME Subject Matter Expert
SRI Stanford Research Institute
SVP Senior Vice President
TS Tar Sands
USMC United States Marine Corps
VBA Visual Basic for Applications (Microsoft OfficeTM programming language)
VFT Value-Focused Thinking
VoI Value of Information
VP Vice President
WACC Weighted average cost of capital

CHAPTER ONE

Introduction to Decision Analysis

GREGORY S. PARNELL and TERRY A. BRESNICK

Nothing is more difficult, and therefore more precious, than to be able to decide.

—Napoleon, “Maxims,” 1804


1.1 Introduction
1.2 Decision Analysis Is a Socio-Technical Process
1.3 Decision Analysis Applications
1.3.1 Oil and Gas Decision Analysis Success Story: Chevron
1.3.2 Pharmaceutical Decision Analysis Success Story: SmithKline Beecham
1.3.3 Military Decision Analysis Success Stories
1.4 Decision Analysis Practitioners and Professionals
1.4.1 Education and Training
1.4.2 Decision Analysis Professional Organizations
1.4.3 Problem Domain Professional Societies
1.4.4 Professional Service
1.5 Handbook Overview and Illustrative Examples
1.5.1 Roughneck North American Strategy (RNAS) (by Eric R. Johnson)
1.5.2 Geneptin Personalized Medicine for Breast Cancer (by Sean Xinghua Hu)
1.5.3 Data Center Location and IT Portfolio (by Gregory S. Parnell and Terry A. Bresnick)
1.6 Summary
Key Terms
References

1.1 Introduction

The consequences of our decisions directly affect our professional and personal lives. As Napoleon noted in our opening quote, decisions can be difficult, and making good decisions can be very valuable. Our focus is on professional decisions, but the same principles apply to our personal decisions.

We begin by defining a decision. Professor Ronald Howard of Stanford University defines a decision as an irrevocable allocation of resources (Howard, 1988). Consider the contracting process used by many companies and organizations. The company does not make a decision to buy a product or service when they begin thinking about the procurement. They make the decision when they sign a legally binding contract, which obligates them to provide resources (typically dollars) to the supplier of the product or service. Can they change their mind? Absolutely, but they may have to pay contract cancellation fees.