© john chachere– cee 115/215 goals and methods of sustainable building design analysis of...
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© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Analysis of Decisions and Risks
Decision ElementsDecision and Risk Analysis IntuitionExpected Value Decision MakingConflicts of Interest and IncentivesExpected Utility Decision Making
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
A Decision Frame Sets Analytic Range
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Decisions Require a Balanced Basis
Decision Basis has 3 parts:
1. Alternatives (Options)
2. Information (Analyses)
3. Preferences (Preferences)Also need a Decision Rule,
such as MACDADI, Decision Analysis, voting, bargaining, …
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Analysis of Decisions and Risks
Decision ElementsDecision and Risk Analysis IntuitionExpected Value Decision MakingConflicts of Interest and IncentivesExpected Utility Decision Making
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Intuition for Decision Analysis
Decision Analysis (DA)is applied Decision Theory; a Structured Conversation leading to Clarity of Action
“DA” is appropriate only if a conversation is possible and clarity is needed
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Uncertainty Makes Decisions ComplexHow Much Tornado-Proofing Makes Sense?
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Intuition for Risk Analysis
Often Important: Soil Conditions, Weather, Earthquakes, Defects, Real Estate Market …Rarely Important: Nuclear War (can’t act on the risk), labor rates (don’t change much)…
Magnitude of a risk = eventprobability times consequence
Probability
Con
sequ
ence
High Magnitude Risks
Low Magnitude Risks
Importance of risk for a decision =Effect on risk magnitude
Ear
thqu
ake
(she
ar w
alls
)E
arth
quak
e(s
hear
wal
ls)
Nuc
lear
War
(no
deci
sion
)N
ucle
ar W
ar(n
o de
cisi
on)
Price Escalation(minimize steel)Price Escalation(minimize steel)
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Analysis of Decisions and Risks
Decision ElementsDecision and Risk Analysis IntuitionExpected Value Decision MakingConflicts of Interest and IncentivesExpected Utility Decision Making
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Formal Method 1:Maximize Expected Value (Average Result)= Sum (probabilities times outcomes)
Ex: Structural Decision Using Expected Value
EV(Profit | Steel) =$30M x 0.50 + $0M x 0.50 = $15M
EV(Profit | Concrete) = $10M x 1.00 = $10M
ReinforcedConcrete
$10Mprofit
$10Mprofit
100%
Steel Steel is Cheap
50% (Heads)
Steel is Expensive50%(Tails)
$30Mprofit
$30Mprofit
$0Mprofit
$0Mprofit
How can a large, profit-seeking company choose between these structural design options?
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Analysis of Decisions and Risks
Decision ElementsDecision and Risk Analysis IntuitionExpected Value Decision MakingConflicts of Interest and IncentivesExpected Utility Decision Making
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Getting the Team to Decide Well is Complex
How can the company ensure employees make the best choices (e.g., Steel)?
Managers have differing payoffs from the company, “conflicts of interest” (e.g, politics, self-aggrandizement, personal aesthetic views)
This classic challenge is known as a “Principal Agent” problem.
A common solution: try to “align incentives” to share the benefits of success
What if your incentive for the structural decision was 10% of profit?
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
What if your incentive for the structural decision was 10% of profit?
Best Decision Depends on Individual
$3M
$0M
100%$1M$1M
EV(Income | Steel) =$3M x 0.50 + $0M x 0.50 = $1.5M
EV(Income | Concrete) = $1M x 1.00 = $1M
What if you were a billionaire?
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Analysis of Decisions and Risks
Decision ElementsDecision and Risk Analysis IntuitionExpected Value Decision MakingConflicts of Interest and IncentivesExpected Utility Decision Making
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Ex: Structural Decision Using Expected Utility
To formally analyze decisions with “high risk,” assess each outcome’s utility (usefulness)
Formal Method 2:Maximize Expected Utility (Avg. Satisfaction)= Sum (probabilities times outcome utilities)
Good Market 50% (Heads)
Bad Market 50%(Tails)
$3M$3M
$0M$0M$1M$1M 100%
Example: assume that$3M is 1.5x as useful as $1M
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Intuition: Risk Attitude is PersonalRisk AverseIf each dollar is less useful than the last, it’s generally better to avoid big gambles
Risk Seeking (less common)If each dollar is more useful than the last, it’s generally better to take big gambles
Risk NeutralIf each dollar is about as useful as the last, decisions can use expected value
Rule of thumb: If range of outcomes is < 1/8 total wealth, use Risk Neutrality as an approximatione.g., Insure catastrophes onlyMACDADI uses risk neutrality, but can be changed
© J
ohn
Chac
here
– CE
E 11
5/21
5 G
oals
and
Met
hods
of S
usta
inab
le B
uild
ing
Desig
n
Analysis of Decisions and Risks
Decision ElementsDecision and Risk Analysis IntuitionExpected Value Decision MakingConflicts of Interest and IncentivesExpected Utility Decision Making