Sensitivity Analysis A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price. Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction(s). Sensitivity analysis is very useful when attempting to determine the impact the actual outcome of a particular variable will have if it differs from what was previously assumed.. For example, an analyst might create a financial model that will value a company's equity (the dependent variable) given the amount of earnings per share (an independent variable) the company reports at the end of the year and the company's price-to-earnings multiple (another independent variable) at that time. The analyst can create a table of predicted price-to-earnings multiples and a corresponding value of the company's equity based on different values for each of the independent variables. Value of Information Value of information (VoI) in decision analysis is the amount a decision maker would be willing to pay for information prior to making a decision. VoI is sometimes distinguished into value of perfect information, also called value of clairvoyance (VoC), and value of imperfect information. They are closely related to the widely known expected value of perfect information and expected value of sample information. Note that VoI is not necessarily equal to "value of decision situation with perfect information" - "value of current decision situation" as commonly understood. The above definition illustrates that the value of imperfect information of any uncertainty can always be framed as the value of perfect information, i.e., VoC, of another uncertainty, hence only the term VoC will be used onwards. There are two extremely important characteristics of VoI that always hold for any decision situation; • Value of information can never be less than zero since the decision-maker can always ignore the additional information and makes decision as if such information is not available. • No other information gathering/sharing activities can be more valuable than that quantified by value of clairvoyance. In decision theory, the expected value of perfect information (EVPI) is the price that one would be willing to pay in order to gain access to perfect information.[1] The problem is modeled with a payoff matrix Rij in which the row index i describes a choice that must be made by the payer, while the column index j describes a random variable that the payer does not yet have knowledge of, that has probability pj of being in state j.
Roy, B. (1993). Decision science or decision-aid science? European journal of operational research , 66 (2), 184-203.
Due to the unique nature of the intelligence field, error of judgments can (and has) had catastrophic consequences. These errors are a result of complex decision making processes involved in the generation of intelligence products, affected by not only training and expertise, but by cognitive factors, particularly bias. The aim of this paper is to identify two different models of decision making (bounded rationality and intuitive decision making), the biases found in both models that affect the final intelligence product, and how these biases can be mitigated in order to avoid intelligence failures or minimise their impact.
In other words, the kind of choice made is dependent on an individual’s values. According to Margaret McLean, the selection between good or bad is made depending on three ways. In the first case, an individual thinks all that matters are the results. As such, why not lie? The outcomes may be bad, and it will hurt people. In the second perspective, individuals are guided by the rules. Therefore, why not lie? The rules mandate the truth. In the third case, a person chooses not to lie because of his/her values. For instance, they are honest. Therefore, an individual’s decision-making process is guided by the anticipated results, rules, and character traits (McLean,
“The value of the next best alternative foregone as the result of making a decision”(Brue, 2005)
V represents Value Added - interventions should increase the worth of the situation for the internal organization or external client.
...nal state., the extent to which a person knows about the accuracy of their judgements is referred as calibration, a vital part of making de decision about what is right for you.
The Net Present Value (NPV) is a Discounted Cash Flow (DCF) technique that relies on the concept of opportunity cost to place a value on cash inflows arising from capital investment, where opportunity cost is the "calculation of what is sacrificed or foregone as a result of a particular decision".
Prospect theory is a descriptive model concerning the issue of decision making under risk. The theory stated that people tend to made decision by examining the potential gain and loss comparing to reference point and exhibit certain kinds of heuristics and biases in this process such as certainty effect, reflection effect, probabilistic insurance and isolation effect. It also divided choice process into editing phases and the subsequent phase of evaluation, which were modified to framing and valuation phases in the later version (Kahneman and Tversky, 1979, Tversky and Kahneman, 1992).
Differential analysis is useful in many situations faced by the management and it has to choice between different alternatives for each situation to make the necessary decision. Some of these situations are as follows:
Birchler and Butler (2007) stated that there are many reasons to know in depth about economics of information, which are information is an interesting economic good, economics is about information, information is of strategic importance and information economics is a young field with practical relevance in many context.
It can be agreed that the more knowledgeable a person is, the better their decision making
Once risk likelihood and consequence have been estimated, the risk can be plotted on a risk reporting matrix (see Figure 15.3.6). Multiplying likelihood by consequence yields the risk level. For qualitative assessments, this will yield a rating such as HL; while quantitative estimates will yield a numerical output. Risk analysis concludes with prioritization of the risks on the register; from highest to lowest risk level.
The general concept of ‘information’ is used in a confused manner. By some it is seen as something we distil from data in order to make decisions, and to a point this could be a true observation. By others it is seen in terms of the understanding that we gain from messages or the knowledge that one person communicates to another and the meanings we create and exchange.
In the world today, information is an important aspect in almost every part of our life. From what time the movie we want to see begins to whether we should buy stock in Dell or IBM, we depend on accurate information. Is this kind of information a commodity? The dictionary defines a commodity as something valuable or useful (Webster 1993). Presently, information is a commodity because people are willing to pay high prices for information in order to make better decisions. In this paper, I will give many examples of how information acts as a commodity. I will also show how information acts as a commodity in other areas than just technology and business.
Sensitivity of the system is the minimum changes in input parameters that effects the output parameter is called sensitivity .