Company Introduction Numetrics Private Limited, Islamabad Pakistan Fully-owned subsidiary of Numetrics Management Systems Based in Silicon Valley in USA A world leader in providing predictive analytics project management software for: ◦ IC ◦ Semi-conductor ◦ Embedded systems organizations The core engineering center for the worldwide organization Has setup an offshore office in Islamabad comprising 30 colleagues.
Six Steps in Decision Making Step 6 Apply the model and make your decision
Decision Making on selection of alternate energy resources in a Software Company
Possible Alternatives Do nothing i e WAPDA electricity and working with 4 hour load shedding Solar plus WAPDA UPS plus WAPDA Generator plus WAPDA ◦
Per Month = 22 days (Unit Price * Total KW *8*22) 134,555 Per Year (for 8 hrs, without load shedding) 1,614,655 Per Year (for 4 hrs daily operation) 807,327 Total Electricity Cost WAPDA - 5 years (for 4 hrs daily operation) 4,036,636 Total Electricity Cost WAPDA - 10 years (for 4 hrs daily operation) 8,073,273 Peak (Rs.) 13.20 Off Peak (Rs.) 8.01 Assuming Average (Rs.) (Peak+Off Peak)/2 10.61 Total Load (KW) 48.06 Electricity Cost Rs. Per Hr (Unit Price * Total KW) 509.68 Additional Surcharges @ 50% (Fuel Adjustment + GST + Duty ) 764.51 1Electricity Cost - WAPDA 1.1Electricity Cost - WAPDA @ Total Load Calculation with 4 hrs daily load-shedding 1 Unit Price for 1 KWH (Rs.) WAPDA Electricity Cost Rs
Per Month = 22 days (Unit Price * Total KW *8 hrs*22 days) 78,392 Per Year (without load shedding) (month * 12 ) 940,706 Per Year (for 4 hrs daily operation) 470,353 Total Electricity Cost WAPDA - 5 years (for 4 hrs daily operation) 2,351,765 Total Electricity Cost WAPDA - 10 years (for 4 hrs daily operation) 4,703,530 Peak (Rs.) 13.20 Off Peak (Rs.) 8.01 Assuming Average (Rs.) (Peak+Off Peak)/2 10.61 1 Unit Price for 1 KWH (Rs.)WAPDA Electricity Cost Rs. (Partial for AC/Ref. only) Electricity Cost - WAPDA Electricity Cost - WAPDA Partial Load Calculation only for AC & Refrigerator Load (28 KW) ) For further consideration with UPS and Solar options which don't support AC/Ref loads)
B.Revenue Loss due to 4 hrs daily load-shedding No of Employees30 Total Salaries per month (22 days)3,000,000 Total Salaries per hr17,045 Total Salaries loss per day (4 hrs-load shedding)68,182 Total Revenue loss per day (4 hrs-loadshedding) Assuming 25% of salaries17,045 Total Revenue Loss per month (22 days) (4 hrs-load shedding)375,000 Total Revenue Loss per year (12 months) (4 hrs-loadshedding)4,500,000 Total Revenue Loss for 5 years (4 hrs-loadshedding)22,500,000 Total Revenue Loss for 10 years (4 hrs-loadshedding)45,000,000
2Electricity Cost - SOLAR + WAPDA (Partial) Solar SystemCapacityCost (Rs.) Electriciy Load (KW)48.06 Electriciy Load (KVA) (1 KVA = 0.8 * KW)38.448 Solar System Initial Cost Solar Panels + Inverters + Charge Controller + Install Cost 4,108,000 Batteries Cost 5,131,000 Solar System Total Initial + Running Cost (5 years)9,239,000 WAPDA Partial Load Cost for AC + Refrigerator (5 years)2,351,765 Total Solar (Initial + Running ) + WAPDA Partial Load Cost ( 5 years) 11,590,765 Solar Batteries Upgrade after 5 years 5131000 Solar System Total Initial + Running Cost (10 years) (5 years cost + batteries replacement after 5 years) 14,370,000 WAPDA Partial Load Cost for AC + Refrigerator (10 years)4,703,530 Total Solar (Initial + Running ) + WAPDA Partial Load Cost ( 10 years) 19,073,530
3Electricity Cost - UPS + WAPDA Dedicated UPS Electriciy Load (KW) 48.06 Electriciy Load (KVA) (1 KVA = 0.8 * KW) 38.45 UPS Capacity (KVA) 10 No. of Units Required 8 Installed capacity (KVA) 80 UPS Cost per unit 345,000 UPS Cost per unit + Maintenance @30% during 5 years 448,500 Total UPS Install Cost for 5 years (Rs.) Assuming 5 year life 3,588,000 WAPDA Supply Cost for 5 years (4 hrs daily) 4,036,636 UPS Charging cost on WAPDA supply for 5 years (after 4 hrs discharge daily) WAPDA Supply * 1.5 6,054,954 Total Cost for 5 years (UPS Install + UPS Operation + WAPDA Supply for 4 hrs) (Rs.) 10,091,591 Total Cost for 10 years (UPS Install + UPS Operation + WAPDA Supply for 4 hrs) (Rs.) 20,183,181
4 Electricity Cost - Generator + WAPDA Generator Capacity (KVA) 60 Capacity (kW) 75 Initial Cost (assuming 10 years life) 2,200,000 Running cost per hr (Diesel, Parts, Maintenance) 650 Running cost per 4-hr (daily load-shedding) 2,600 Running cost per month 22 days (4-hr daily load- shedding) 57,200 Generator Running cost per year (during 4-hr daily load-shedding) 686,400 Generator Running cost for 5 years (during 4-hr daily load-shedding) 3,432,000 Total Generator Cost for 5 years (Running cost + initial cost) for 4 hr daily operation 5,632,000 WAPDA Supply cost for 5 years (4 hrs daily) 4,036,636 Total Generator + WAPDA Cost for 5 years (4 hrs WAPDA + 4 hrs Generator) 9,668,636 Generator Running cost for 10 years (4-hr daily operation) 6,864,000 Total Generator Cost for 10 years (Running cost + initial cost) for 4 hr daily operation 9,064,000 WAPDA Supply cost for 10 years (4 hrs daily) 8,073,273 Total Generator + WAPDA Cost for 10 years (4 hrs WAPDA + 4 hrs Generator) 17,137,273
Decision making models used Maximax Prospect Theory Decision Tree
Decision Making Models Applied Decision theory is an analytic and systematic approach to the study of decision making models. Good decision; logical, considering all available data, alternatives and application of quantitative decision model. Decision Making Environments Certainty: alternatives and outcomes known with certainty-e g interest on income. Risk: alternatives and Probability of occurrence of each outcome known-e g fliping of coin. Uncertainty: Probability of occurrence of each outcome not known-e g election results after 10 years.
Decision Making under Risk ◦Probabilistic decision situation ◦EMV is the weighted sum of possible payoffs for each alternative. ◦EOL requires an opportunity loss table; it is the amount lost by not picking the best alternative/solution. ◦Maximum EMV and Minimum EOL will always give same result. ◦Sensitivity Analysis investigates how our decision might change with different input data /probability scenario. ◦Decision Trees used for large sequential decision problems.
Decision making under Uncertainty ◦Probability data not available ◦Maximax is an optimitic approach/decision criterion as it maximizes the maximum outcome for every alternative ◦Maximin is a pessimistic approach/decision criterion as it maximizes the minimum outcome for every alternative ◦Equally Likely (Laplace Criterion) computes the highest average outcome ◦Criteria of Realism (Hurwicz Criterion) uses the weighted average approach( personal choice of alpha 0-1;alpha close to 1 ;optimistic decision maker ) ◦Minimax Regret is based on opportunity loss;it finds the alternative that minimizes the maximum opportunity loss with in each alternative
Decision Making Models Applied Decision making models under uncertainty Maximin Minimax Regret Laplace Hurwicz Decision making models under Risk EMV( Expected monetary value) EOL( Expected opportunity loss) Decision Tree Sensitivity Analysis Prospect Theory
OPTIONS Net Savings -5 yrs (Revenue Gain - Elect. Cost – Revenue Losses) Net Savings- 10 yrs (Revenue Gain - Elect. Cost – Revenue Losses) 1 (Do Nothing) WAPDA Supply for 4 hrs daily -26,536,636-53,073,273 2 SOLAR + WAPDA (Partial) 10,909,23525,926,470 3 UPS + WAPDA12,408,40924,816,819 4 Generator + WAPDA12,831,36427,862,727 Decision Model
Decison making model under uncertainity OptionsRegret TableMinimax Regret Do Nothing39,368,00080,936,000 Solar + WAPDA 1,922,1291,936,571,922,129 UPS + WAPDA 422,9553,045,908 Generator + WAPDA 000
Decision making under uncertainty Maximax Max in a row` Maximin Min in a row Laplace Row Average (Equally Likely) hurwicz Criterion of Realism Alpha | 0.4 Alpha(max) + (1-alpha)(min) Minimax Regret - 26,536,636 -53,073,273 [(-26,536,636 -53,073,273)]/2 =- 39,804,954.5- 42,458,618.2 39,368,000 80,936,000 25,926,470 10,909,235 [ (10,909,235+ 25,926,470)]/2 = 18,417,852.5 16,916,19 1,922,129 1,936,57 24,816,819 12,408,409 [( 12,408,409+ 24,816,819)]/2 =18,612,614 17,371,773 422,955 3,045,908 27,862,727 12,831,364 [(12,831,364+ 27,862,727)]/2 = 20,347,045.5 18,843,909.2 0000
Decision making model under Risk EOL 5 Years prob=0.5 EOL 10 Years prob=0.5 EOL Value EMV 39,368,000 80,936,00019,684,004.47- 39,804,618.2 1,922,129 1,936,571,057,893 18,417,852.5 422,9553,045,9081,734,431.5 18,612,614 0 00 18,843,909.2
Decision Making under Uncertainty Criterion Choice Alternative MaximaxGenerator plus WAPDA MaximinGenerator plus WAPDA Laplace (Equally Likely) Generator plus WAPDA Hurwicz (Criteria of Realism) Generator plus WAPDA Minimax(Regret)Generator plus WAPDA
Criterion Choice Alternative EMV Generator plus WAPDA EOLGenerator plus WAPDA Sensitivity AnalysisGenerator plus WAPDA Decision TreeGenerator plus WAPDA Prospect TheoryGenerator plus WAPDA Decision Making under Risk
Decision planning Making a decision without planning is fairly common but does not often end well. Planning allows for decisions to be made comfortably and in a smart way. Planning makes decision making a lot more simple than it is. Decision will get four benefits out of planning: 1. It gives chance to the establishment of independent goals. It is a conscious and directed series of choices. 2.Provides a standard of measurement. It is a measurement of whether you are going towards or further away from your goal. 3. It converts values to action. 4. Allows for limited resources to be committed in an orderly way. Always govern the use of what is limited to you. (e.g. money, time, etc.)
Decision making In the real world, most of our decisions are made unconsciously in our mind. Decision-making models offer analytical tools which can be combined to provide useful insights. No perfect model as decision environments vary. Therefore risk preference/profile and decision environment may dictate choice of appropriate model. Decision planning must be done. Cognitive Biases must be taken care off. Objectives must first be established. Objectives must be classified and placed in order of importance. Alternative actions must be developed.
Alternative must be evaluated against all the objectives. Alternative that is able to achieve all the objectives is the tentative decision. Tentative decision be evaluated for more possible consequences. Decisive actions be taken and additional actions must be taken to prevent any adverse consequences from becoming problems and starting both systems (problem analysis and decision making) all over again. Selected Decision model steps be followed to determine an optimal plan. In a situation featuring conflict, role-playing is helpful for predicting decisions to be made by involved parties.
Cognitive and personal biases in decision making Biases can creep into our decision making processes. Confirmation bias in psychology- (Scott Plous, 1993) – People tend to be willing to gather facts that support certain conclusions but disregard other facts that support different conclusions. Premature termination of search for evidence – People tend to accept the first alternative that looks like it might work. Cognitive inertia – Unwillingness to change existing thought patterns in the face of new circumstances.
Selective perception – We actively screen-out information that we do not think is important. (e g prejudice.) Wishful Thinking – a tendency to want to see things in a positive light, which can distort perception and thinking. Choice Supportive Bias- occurs when people distort their memories of chosen and rejected options to make the chosen options seem more attractive. Recency – People tend to place more attention on more recent information and either ignore or forget more distant information. Repetition bias – A willingness to believe what one has been told most often and by the greatest number of different sources.
Anchoring and adjustment – Decisions are unduly influenced by initial information that shapes our view of subsequent information Group think – peer pressure to conform to the opinions held by the group. Source credibility bias – A tendency to reject a person's statement on the basis of a bias against the person, organization, or group to which the person belongs. People preferentially accept statement by others that they like.
Incremental decision making and escalating commitment – We look at a decision as a small step in a process and this tends to perpetuate a series of similar decisions; can be contrasted with zero-based decision makin. Attribution asymmetry – People tend to attribute their own success to internal factors, including abilities and talents, but explain their failures in terms of external factors such as bad luck. Role fulfillment – A tendency to conform to others' decision-making expectations. Illusion of control–People tend to underestimate future uncertainty because of a tendency to believe they have more control over events than they really do.