(Excerpt from: Clemen, Robert T., and Terence Reilly, Making Hard Decisions
with DecisionTools.
Copyright (2001) by Duxbury Press, Belmont CA. This material may not be reproduced
without the express written permission of Duxbury Press.)
CONTENTS
Introduction
New in this Version: Palisade's DecisionTools
Guidelines for Students
A Word to Instructors
Keeping Up with Changes
Acknowledgements
INTRODUCTION
This book provides a one-semester overview of decision analysis for advanced undergraduate and master's degree students. The inspiration to write it has come from many sources, but perhaps most important was a desire to give students access to up-to-date information on modern decision analysis techniques at a level that could be easily understood by those without strong mathematical background. At some points in the book, the student should be familiar with basic statistical concepts normally covered in an undergraduate applied-statistics course. In particular, some familiarity with probability and probability distributions would be helpful in Chapters 7 through 12. Chapter 10 provides a decision-analysis view of data analysis, including regression, and familiarity with such statistical procedures would be an advantage when covering this topic. Algebra is used liberally throughout the book. Calculus concepts are used in a few instances as an explanatory tool. Be assured, however, that the material can be thoroughly understood, and the problems can be worked, without any knowledge of calculus.
The objective of decision analysis is to help a decision maker think hard about the specific problem at hand, including the overall structure of the problem as well as his or her preferences and beliefs. Decision analysis provides both an overall paradigm and a set of tools with which a decision maker can construct and analyze a model of a decision situation. Above all else, students need to understand that the purpose of studying decision-analysis techniques is to be able to represent real-world problems using models that can be analyzed to gain insight and understanding. It is through that insight and understanding -- the hoped-for result of the modeling process -- that decisions can be improved.
NEW IN THIS VERSION: PALISADE'S DECISIONTOOLS
This is not a new edition of Making Hard Decisions. It includes virtually all of the material that is in the original version of the second edition. What is different, though, is that this version focuses on the use of an electronic spreadsheet as a platform for modeling and analysis. Spreadsheets are both widely available and powerful tools for decision making, and in the future managers will need to be able to use this flexible tool effectively.
The flexibility of electronic spreadsheets make them ideal as general-purpose tools for decision analysts. At the same time, though, the analyst needs specialized tools for building and analyzing decision models. This version of Making Hard Decisions integrates Palisade Corporation's DecisionTools suite of software. DecisionTools is designed specifically to work with and enhance the capabilities of Microsoft Excel for use by decision analysts.
DecisionTools consists of five programs (PrecisionTree, TopRank, @RISK, BestFit, and RISKView), each designed to help with different aspects of modeling and solving decision problems. PrecisionTree is a versatile program that solves both decision trees and influence diagrams. TopRank performs sensitivity analysis on spreadsheet models. @RISK is a Monte Carlo simulation program. BestFit and RISKView are sprecialized programs designed to help choose the best probability distribution for modeling an uncertainty. PrecisionTree, TopRank, and @RISK are all spreadsheet add-ins for Microsoft Excel. When one of these programs is opened, its functions are displayed in an Excel toolbar. BestFit and RISKview can operate either within @RISK or as stand alone programs. Along with the CD containing the programs, we have included instructions on how to use the software and interpret the output. The instructions provide step-by-step guides through the important features of the programs and are included at the ends of appropriate chapters. The book's endsheets show where the various programs, features, and analytical techniques are covered.
The DecisionTools software can be a powerful ally for the analyst. The software can help create a model as well as analyze it in many different ways. This assumes, of course, that you have learned how to use the software! Thus, we have included at the ends of appropriate chapters instructions for using the programs that correspond to the chapter topic. Interspersed throughout the instructions you will find explanations of the steps along with tips on interpreting the output. Once you know the software, you will find the problems are eaier to work and even fun.
GUIDELINES FOR STUDENTS
Along with instructions to use the DecisionTools software, this version of Making Hard Decisions covers most of the concepts we consider important for a basic understanding of decision analysis. Although the text is meant to be an elementary introduction to decision analysis, this does not mean that the material is itself elementary. In fact, the more we teach decision analysis, the more we realize that the technical level of the math is low, while the level of the analysis is high. Students must be willing to think clearly and analytically about the problems and issues that arise in decision situations. Good decision analysis requires clear thinking; sloppy thinking results in worthless analysis.
Of course, some topics are more demanding than others. The more difficult sections are labeled as "optional." Our faith in students and readers compels us to say that anyone who can handle the "nonoptional" material can, with a bit more effort and thought, also handle the optional material. Thus the label is perhaps best thought of as a warning regarding the upcoming topic. On the other hand, if you do decide to skip the optional material, no harm will be done.
In general, we believe that really serious learning happens when problems are tackled on one's own. We have included a wide variety of exercises, questions, problems, and case studies. The exercises are relatively easy drills of the material. The questions and problems often require thinking beyond the material in the text. Some concepts are presented and dealt with only in the problems. Do not shy away from the problems! You can learn a lot by working through them.
Many case studies are included in Making Hard Decisions. A few of the many successful applications of decision analysis show up as case studies in the book. In addition, many issues are explored in the case studies in the context of current events. For example, the AIDS case at the end of Chapter 7 demonstrates how probability techniques can be used to interpret the results of medical tests. In addition to the real-world cases, the book contains many hypothetical cases and examples, as well as fictional historical accounts, all of which have been made as realistic as possible.
Some cases and problems are realistic in the sense that not every bit of information is given. In these cases, appropriate assumptions are required. On one hand, this may cause some frustration. On the other hand, incomplete information is typical in the real world. Being able to work with problems that are "messy" in this way is an important skill.
Finally, many of the cases and problems involve controversial issues. For example, the material on AIDS (Chapter 7) or medical ethics (Chapter 15) may evoke strong emotional responses from some readers. In writing a book like this, there are two choices. We can avoid the hard social problems that might offend some readers. Or we can face these problems that need careful thought and discussion. The text adopts the second approach because we believe these issues require society's attention. Moreover, even though decision analysis may not provide the answers to these problems, it does provide a useful framework for thinking about the difficult decisions that our society must make.
A WORD TO INSTRUCTORS
Many instructors will want to supplement Making Hard Decisions with their own material. In fact, topics that we cover in our own courses are not included here. But, in the process of writing the book and obtaining comments from colleagues, it has become apparent that decision-making courses take on many different forms. Some instructors prefer to emphasize behavioral aspects, while others prefer analytical tools. Other dimensions have to do with competition, negotiation, and group decision making. Making Hard Decisions does not aim to cover everything for everyone. Instead, we have tried to cover the central concepts and tools of modern decision analysis with adequate references (and occasionally cases or problems) so that instructors can introduce their own special material where appropriate. For example, in Chapters 8 and 14 we discuss judgmental aspects of probability assessment and decision making, and an instructor can introduce more behavioral material at these points. Likewise, Chapter 15 delves into the additive utility function for decision making. Some instructors may wish to present goal programming or the analytic hierarchy process here.
Regarding the DecisionTools software, we wrote the instructions to be a self-contained tutorial. Although the tutorial approach works well, we also believe that it must be supplemented by guidance from the course instructor. One possible way to supplement the instructions is to walk the students through the instructions in a computer lab. This will allow the instructor to answer questions as they arise and will allow students to learn the software in a more controlled environment. No new material need be prepared for the computer-lab session, and in the text the students have a written copy of the instructions for later reference.
KEEPING UP WITH CHANGES
The world changes quickly, and decision analysis is changing with it. The good news is that the Internet can help us keep abreast of new developments. We encourage both students and instructors to visit the website of the Decision Analysis Society at http://www.fuqua.duke.edu/faculty/daweb/. This organization provides focus for decision analysts worldwide and many others with interests in all aspects of decision making. And on the Section's web page, you will find links to many related sites.
While you are keeping up with changes, we hope that you will help us do the same. Regarding the software or instructions in using the software, please send your comments to Terence Reilly at {reilly -at- babson -dot- edu}. You may also send regular mail to Terence Reilly, Mathematics Division, Babson College, Babson Park, MA 02457 or to Palisade Corporation, 31 Decker Road, Newfield, NY 14687. You may also contact Palisade at http://www.palisade.com.
For all other non-software matters, please send comments to Robert Clemen at {clemen -at- duke -dot- edu}You may also send regular mail to Robert Clemen, Fuqua School of Business, Duke University, Durham, NC 27708. Please send information about (hopefully the few) mistakes or typos that you may find in the book, innovative ways to teach decision analysis, new case studies, or interesting applications of decision analysis.
ACKNOWLEDGMENTS
It is a pleasure to acknowledge the help we have had with the preparation of this text. First mention goes to our students, who craved the notes from which the text has grown. For resource support, thanks to the Lundquist College of Business at the University of Oregon, Decision Research of Eugene, Oregon, Applied Decision Analysis, Inc., of Menlo Park, California, the Fuqua School of Business of Duke University, Babson College, and the Board of Research at Babson College for financial support.
A number of individuals have provided comments on portions of the book at various stages. Thanks to Elaine Allen, Deborah Amaral, Sam Bodily, Adam Borison, Cathy Barnes, George Benson, Dave Braden, Bill Burns, Peter Farquhar, Ken Gaver, Andy Golub, Gordon Hazen, Max Henrion, Don Keefer, Ralph Keeney, Robin Keller, Craig Kirkwood, Don Kleinmuntz, Irv LaValle, George MacKenzie, Allan Murphy, Bob Nau, Roger Pfaffenberger, Steve Powell, Gordon Pritchett, H.V. Ravinder, Gerald Rose, Sam Roy, Rakesh Sarin, Ross Shachter, Jim Smith, Bob Winkler, and Wayne Winston. Special thanks to Deborah Amaral for guidance in writing the Municipal Solid Waste case in Chapter 9; to Dave Braden for outstanding feedback as he and his students used manuscript versions of the first edition; to Susan Brodt for guidance and suggestions for rewriting the creativity material in Chapter 6; and to Kevin McCardle for allowing the use of numerous problems from his statistics course. Vera Gilliland and Sam McLafferty of Palisade Corporation have been very helpful. Thanks also to all of the editors who have worked closely with us on this and previous editions over the years: Patty Adams, Marcia Cole, Mary Douglas, Anne Draus, Keith Faivre, Curt Hinrichs, and Michael Payne.
Finally, we sincerely thank our families and loved ones for their understanding of the times we were gone and the hours we have spent on this text.
Robert T. Clemen
Terence Reilly
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