16:540:675: Advanced Engineering Economics II

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16540675 Advanced Engineering Economics (II)
Assumptions, Methodology and Applicability of
Uncertainty Analysis for Risky Project A Survey
Instructor Dr. J. Luxhoj Xiaolan Song
Department of Statistics, Rutgers December 13,
2000
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Motivations of the Project

• Extension of the special topic )
• Trend of Uncertainty analysis ?
• My background ))

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Roadmap of Uncertainty Analysis
Enumeration graphical technique Metamodeling
techniques

• Sensitivity analysis
• Probabilistic analysis
• Fuzzy set technique
• AHP method

Regression Neural network
Monte Carlo simulation Bayesian approach
Single objective risk analysis Multi-objective
risk analysis

• Integrated procedures

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Sensitivity Analysis New Outlook

• Sensitivity analysis is presented in a tabular
  format, a graphic format or summarized, as in
  break-even analysis.
• ? Eschenbach (1989) graphical sensitivity
  analysis.
• ? Sartori Smith (1997) a linear metamodel
  approach combined experiment design with
  multiple regression.
• ? Badiru Sieger (1998) an ANN model to
  predict the potential returns from an project
  having stochastic parameters.

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Probabilistic Analysis The classic choice

• Monte Carlo simulationstudy the interactions
  and relationships between qualitative and
  quantitative decision variables
• Bayesian Method elegantly developed for many
  probability distributions
• ? Prueitt Park (1997) fit 3-point estimates
  into beta distribution
• ? Harpaz Thomadakis (1984) estimate mean of
  an identical cash flow
• ? Sarpar (1993) handle uniformly distributed
  economic parameters
• ? Chandra Guild (1985) the economic life is
  randomly distributed
• ? Kangari Riggs (1989) limitations of
  probabilistic models

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Fuzzy Set Analysis, AHP and Others

• Fuzzy Set Analysis best for vague data with no
  previous knowledge and requires the estimates
  provided by experts.
• --- Karsak (1998) Fuzzy discounted cash
  flow (DCF)
• Analytical Hierarchy Process (AHP)
• --- Mustafa Al-bahar (1991) choose
  risk factors
• Other methods
• --- Wierzbicki Granat (1999)
  Multi-objective modeling
• --- Butler et al. (1997) simulation
  techniques for multi-criteria models
• --- Vermeulen et al.(1996)
  stochastic multi-factor model

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Risk Analysis as An Integrity

• Sartori Smiths (1997)
• Experimental
  Design Regression Simulation
• Diekmann (1997)
• Monte Carlo
  Influence Diagram
• Wendling Lorance (2000)
• Schedule risk
  analysis Cost risk analysis
• Mustafa Al-bahar (1991)
• AHP Sensitivity
  Analysis

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Summary/Conclusion

• Four methodologies for capital project
  sensitivity analysis, probabilistic analysis,
  fuzzy set technique, and AHP method
• Efforts are focus on multi-objective,
  multi-criteria modeling
• Comprehensive procedures integrated multiple
  methods looks popular
• Analyze project with stochastic viewpoint ?
• Analysis on area of post-audit and control ?