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The Art of the Trade Study

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1 The Art of the Trade Study
Mark A. Wilson Strategy Bridge International, Inc. 12020 Sunrise Valley Dr, Suite 100 Reston, VA (703) FAX: (703)

2 Real-World Trades How do you deal with: Complexity
Conflicting objectives and multiple alternatives Overload Trying to consider numerous factors at once Implicit assumptions “Seat of the pants” conclusions Engineering Team Buy-in Decisions with lukewarm support

3 How do engineers really make decisions?
Automatic Processing (Intuition) Analytic Processing (Rational Analysis) How often do you use your intuition to make engineering decisions?

4 The Trouble with Intuition
Common Cognitive Biases in Engineering Decisions Group Think Status Quo Bias Overconfidence Bias Wishful Thinking Errors Input Bias Confirming Evidence Bias Common Effects: Failure to critically examine all alternatives Tendency to continue to “do things the way we we’ve done them.” Illusion of control over stochastic events Overestimation of probability of desired outcomes Independent events have no memory.

5 How does “stress” affect decision-making?
Principle of “Constancy” Disruption of stable relations with environment is perceived as a “threat” that induces a cognitive response to reestablish stability Loss of constancy = stress, which triggers SNS “fight or flight” Effects of Stress Occupies working memory Emotion tends to dominate reason Disrupts cognitive processes, especially complex information processing Encourages heuristic thinking Attention is focused on one or two salient cues Disproportionate weight ascribed to negative information Tendency to lock in and defend the first chosen strategy SNS response: digestion shuts down, arteries dilate and blood vessels direct blood to body core and away from extremities PNS “backlash” explains why people are very sleepy after very stressful events

6 “Figuring out how to think about the problem”
When asked what single event was most helpful in developing the theory of relativity, Albert Einstein reportedly answered: Framing is about creativity. “Figuring out how to think about the problem”

7 The Master Decision-Making Skill: Framing
How you define a problem will largely determine how you will go about solving it Frame = Decision Context Framing is how you define the problem. It’s the first step in the process, therefore it has tremendous leverage on all the other steps. How you frame the problem defines the set of alternatives you will consider. This is a critically important point. Sounds easy, doesn’t it? But we’re going to show you that it can be trickier than think. Later on I’m going to share some examples of how very intelligent people solved the wrong problem, which wound up costing lots of money, and lost lives as well. Context is the set of alternatives appropriate to a specific situation

8 - Judgment and Choice, Robert Hogarth
Helpful Questions What is your ultimate objective? What is the crux of the issue or problem? How does the decision affect other decisions? What information do we have about similar problems or decisions made previously? How will we implement the solution? Ultimate objective: highest level Ask someone with a fresh perspective for their opinion “There are no decision aids that can structure a problem automatically. Rather, this crucial phase must be largely achieved through unaided human judgment” - Judgment and Choice, Robert Hogarth

9 Technique: Means Objective Network
Station Keeping for Entire Constellation Decrease Risk Of Losing New Assets System can Expand with Constellation Option Confidence Supportable Solution Operators Understand System Brainstorm all objectives then ask “why is that important” to tie all objectives back to the “fundamental” reason. Tie together to find the originating concept – because it is! Look at page 44 in text book. System to come On line quickly Maintain S/W Maintain H/W Integrate into Existing Systems Produce Adequate Documentation

10 Generating Alternatives
“Alternatives are the raw material of decision making” -Smart Choices by Hammond, Keeney & Raiffa After the problem has been framed, ask: “How can we obtain the desired outcome?” Challenge constraints – look at the problem from new angles Be creative, let process diverge Gather information, if necessary Withhold judgment until the evaluation phase

11 What methods or techniques do you use to generate alternatives to consider in your trade studies?
Failure to recognize a problem in time Procrastination Failure to recognize a paradigm shift Preoccupation with fire-fighting Internal politics Lack of will Lack of urgency Organizational myopia Inadequate data Too much data Failure to delegate Incompetence Indecisiveness Too many people involved in the decision Decision bottlenecks Personal bias or prejudice Inaccurate or incomplete information Arrogance Complacency Fear of mistakes Decision delayed until too late Problem ignored or hidden Lack of data Number of people – too many Hidden agenda Lack of authority Resistance to change How do you ensure that you are not considering the same old alternatives while falling into a “status quo” trap?

12 AHP Methodology in Trade Studies
Prioritizes multiple tangible and intangible criteria: In most decisions, intangibles such as political factors and social factors take precedence over tangibles such as economic factors and technical factors It is not the precision of measurement on a particular factor that determines the validity of a decision, but the importance we attach to the factors involved AHP assigns importance to all the factors and synthesizes this diverse information to make the best decision AHP is useful when the complexity of the synthesis required exceeds our cognitive abilities Allows ignoring the absolute numbers and comparing the “feelings” about the relative importance of the various parameters. Real decisions are not objective measures. Example: the decision to use aluminum instead of a titanium alloy for the Boeing 777 wings was not the technically preferred alternative.

13 The Analytic Hierarchy Process
(Saaty- 1971) GOAL CRITERIA Power of AHP: assigning weights based on pair-wise comparisons to create ratios. Or can do ratings model. Ratings model – relative weights of criteria then evaluate how well an alternative satisfies a criteria. Set a rating scale (make sure it is defined). ALTERNATIVES

14 Remember Our Means Objective Network?
Station Keeping for Entire Constellation Decrease Risk Of Losing New Assets System can Expand with Constellation Option Confidence Supportable Solution Operators Understand System System to come On line quickly Maintain S/W Maintain H/W Integrate into Existing Systems Produce Adequate Documentation

15 Establish a Fundamental Objectives Hierarchy
Decision Frame Select a New Telemetry Solution Operability Maintainability Reliability Option Confidence Schedule Risk Growth Potential May not want to include prices as a criteria since it will be considered in the final decision making.

16 AHP Approach How does AHP capture human judgments?
AHP does not require you to make an absolute judgment or assessment. Process uses relative assessment between two items at a time. In relative measurement a preference, judgment is expressed on each pair of elements with respect to the common “parent” element. 19

17 Simplified AHP Criteria Weighting Matrix
Technique Compare a list of items to one another to determine relative importance Uses Developing criteria weights Reveals high impact factors Analytic Hierarchy Process High Impact means they drive the decision. E.g., a factor with a 2% weight is inconsequential compared to one with 40% Fundamental benefit of pair wise – it is easier (1-1) and harnesses intuition. Factor A Factor B

18 Example Top Level Criteria Weights
1 Equal importance 3 Moderate importance of one over another 5 Strong or essential importance 7 Very strong or demonstrated importance 9 Extreme importance 2,4,6,8 Intermediate values Dr. Tom Saaty, originator, software tool “expert choice” Compare rows to columns 1 = Equal 5 = strong preference 9 = extreme preference Do half the matrix, then fill in the inverse on the other side. Across the median blanks are the inverse. Weight column: row total divided by grand total. This gives you the relative weighting. Might throw out safety because it is under 5% - makes one less calculation and will not affect the outcome.

19 Select Telemetry Solution
GOAL Select Telemetry Solution Operability 13% Maintainability 10% Reliability 20% Option Confidence 39% Schedule Risk 3% Growth Potential 15% Supplier A GFE Option Supplier B

20 Build Rating Scales Qualitative Scale (with weights) Excellent = 100%
Acceptable = 60% Marginal = 30% Not Addressed = 0%

21 Rating Alternatives

22 Summary of AHP Advantages
Easy to use in trade studies Organizes, prioritizes and synthesizes complexity within a rational framework Breaks down tangible and intangible criteria into manageable components Fosters critical discussion and examination of implicit assumptions when used with diverse groups Makes it possible to deal with conflicts in perception and in judgment

23 Summary Why have a consistent trade study methodology? Why use AHP?
Overcome negative aspects inherent with intuition (cognitive biases) Permit decision traceability Build justification and help others understand reasoning Improve your trade study process Why use AHP? Does not require absolute assessments Permits comparisons of tangible and intangible factors Fosters rich dialog among engineering team members Straight-forward and easy to use

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