STC 386T2 Risk Analysis

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STC 386T2 Risk Analysis
The Role of Probability
Bagchi STC 386T2
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Probability Assessment
(Chapter 8 of the course text Making Hard
Decisions by Clemen and Reilly) Probability
as relative frequency of occurrence of the
event of interest Probability as subjective
judgment
Bagchi STC 386T2
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Probability Elicitation

• A direct question
• The probability wheel

Bagchi STC 386T2
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Probability Wheel
D
D
b. Probability 0.25
a. Probability 0.33
Bagchi STC 386T2
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Heuristics and Biases
We usually underestimate uncertainty our
distributions are too narrow Even a
little training improves our performance
Bagchi STC 386T2
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Heuristics and Biases
Motivational Bias - Management - Expert
- Salesperson
Bagchi STC 386T2
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Heuristics and Biases
Representative Bias P(Childhood Pet
Ownership/Currently a CEO) 0.94 does not
imply P(Currently a CEO/Childhood Pet
Ownership) 0.94
Bagchi STC 386T2
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Heuristics and Biases
Availability Bias How many seven-letter
English words have the form - - - - - n -?
How many seven-letter English words have the
form - - - - i n g?
Bagchi STC 386T2
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Heuristics and Biases
Anchoring Bias What is the probability of
rain tomorrow? - Greater or smaller than
25? - Greater or smaller than 65?
Bagchi STC 386T2
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Preparing the Subject for Probability Elicitation

• Motivating
• Structuring
• Conditioning

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Preparing the Subject for Probability Elicitation
2. Structuring - specify the uncertain
quantity unambiguously - establish the
underlying assumptions Ex. Price of oil in
July 2003
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Preparing the Subject for Probability Elicitation

• 3. Conditioning
• - the objective is to help the subject expand
  his/her base of available information so that the
  full range of possibilities is considered

Bagchi STC 386T2
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Probability Elicitation A Comprehensive Example
G. G. Shephard and C. W. Kirkwood, Managing
the Judgmental Probability Elicitation Process A
case Study of Analyst/Manager Interaction, IEEE
Transactions on Engineering Management, Vol. 41,
pp. 414-425 (1994)
Bagchi STC 386T2
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Accuracy of Probability Assessment
How accurate do we need to be? The critical
role of sensitivity analysis
Bagchi STC 386T2