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Factors: Things, Circumstances or conditions that cause something to happen; factors beget issues : Issues: points or questions to be disputed or decided : * Study subtleties: lightweight factors and issues : Thinking Patterns: Convergent: bringing together and moving to a single focal point : View a problem more narrowly; winnows the weak alternatives Divergent: Branching out, go in different directions from a single point : Open to creative alternatives, considers all alternatives Four Types of Problems: Simplistic: There is only one answer : Deterministic: Only one answer, but it is determined by a formula : Random: Different answers are possible : Indeterminate: Different answers are possible, but some answers are conjecture, not all possible answers can : be identified Sanity Checking: Does it make sense? Is it practical? Or logical? : Tool 1: Problem Restatement Shift to divergent thinking: Redefine the problem in as many different ways we can think of; let the ideas flow freely. 1. Use the active voice when creating the list. 2. Paraphrase: Restate using different wo without : words changing the meaning 3. 180 Degrees: Reverse the situation into a negative : 4. Broaden the focus: restate in larger context : 5. Redirect the focus: Consciously change the focus : 6. Ask Why? Of the initial statement, then why again and restate the problem Pitfalls: • • • • Too vague or too broad Focus is misdirected – definition too narrow Statement is assumption driven Statement is solution driven
Tool 2: Pros and Cons Steps for Creating Pros and Cons: 1. List all Pros 2. List all Cons 3. Review and consolidate the Cons, merging and eliminating 4. Neutralize as many Cons as possible 5. Compare the Pros and unalterable Cons for all options 6. Pick one option Pro and Cons allows distilling what be the consequence if one was selected. It will be easier to do Cons humans are compulsively critical, but sometime negatives can overwhelm the positive.
Tool 3: Divergent / Convergent Thinking Step 1. Brainstorm (Divergent) Step 2. Winnow and Cluster (Convergent) Step 3. Select practical, promising ideas (Convergent) Rules of Divergent Thinking: • • • The more ideas, the better Build upon one idea to another Wacky ideas are acceptable; break conventional wisdom Don’t evaluate the ideas
Tool 4: Sorting, Chronologies and Timelines Step 1. As you are researching a decision or problem, make Benefits of Chronologies: a list of relevant events and dates, Always list the dates first. • Chronologies shows timing and relevant events Step 2. Construct a chronology, crossing off events as they are included. • • Call attention to key events and to significant gaps Identify patterns and correlations
Timelines can be designed horizontally or vertically.
Tool 5: Casual Flow Diagram Casual Flow Diagram Construction Steps: Casual Affect Factor Diagram 1. Identify major factors 2. Identify Cause-and-Effect Relationships 3. Characterize the relationship (Direct or Inverse) 4. Diagram the relationship 5. Analyze the behavior of the relationship when it is integrated CFD benefits: Identifies the major factors – the engines – that drive the system; how they interact, and whether these interactions are direct or inverse related. Enables us to view the cause and effect relationships as an integrated system and discover linkages that are formerly dimmed and obscured Facilitates our determining the main source of the problem Enables us to conceive alternative corrective measures and to estimate respective effects. Create Causal/Affected Factor Matrix First; then diagram
Casual Flow Diagram (Visual Framework)
Tool 6: Matrix Setup the grid: A matrix enables us to: Change the X and Y axis according to subject matter: Separate elements of a problem Categorize information by type Compare one type of information with another Compare pieces of information of the same type See correlations (patterns) among the information
Tool 7: Decision Event Tree (DET) Steps to Building a Decision Event Tree: 1. Identify the problem 2. Identify the major factors/issues (the decision & events) to be addressed in the analysis 3. Identify alternatives for each of these factors/issues 4. Construct the tree portraying all important alternative scenarios 5. Ensure that the decision/events at each branches of the tree are mutually exclusive 6. Ensure that the decisions/events at each brach are collectively exhaustive Decide if the matrix is a good as using a decision tree.
Decision Event Tree Offers: It dissects a scenario into its sequential events It shows clearly the cause and effect linkages, indicating which decisions and events precede and follow others Shows which decisions and events are dependent on others It shows where the linkages are the strongest & weakest Enables us to visually compare how one scenario differs from another Reveals alternatives we might otherwise not perceive & enables us to analyze them – separately, systematically and sufficiently. It easier to decompose a matrix into a tree, but not viceversa.
Mutually Exclusive & Collectively Exhaustive
• Mutual exclusivity implies that at most one of the events may occur.
One outcome precludes another one from happening, so if we decide this, then we exclude that.. • Compare this to the concept of being collectively exhaustive, which means that at least one of the events must occur.
Conditionally Dependent Events:
• Occurrence of one event depends on another
Tool 8: Weighted Ranking Steps of Weighted Ranking: 1. List all of the major criteria for ranking 2. Pair-rank the criteria Use sort feature to rank items 3. Select the top several criteria and weight them in percentiles (their sum must = 1.0) Another way to setup a weighted matrix 4. Construct a Weighted Ranking Matrix and enter items to be ranked, selected criteria, and the criteria weights. 5. Pair-rank all the items by each criterion, recording in the appropriate space the number of votes each item receives. 6. Multiply the number of votes/tallies/observations by the respective criterions weight. Weighted Ranking Matrix
7. Add the weighted values for each item and enter the sums in the column labeled Total votes 8. Determine the final rankings and enter them in the last column labeled ‘Final Ranking’ – item with the most points is ranked highest. 9. Perform a sanity check
Weighted Arithmetic Mean can be expressed as:
The weights wi represent the bounds of the partial sample. In other applications they represent a measure for the reliability of the influence upon the mean by respective values.
Tool 9: Hypothesis Testing Steps: 1. Generate a hypothesis. Eliminate any implausible hypothesis and combine any similarities. 2. Construct a matrix. Label the first column Evidence. Lable the other columns to the right Hypothesis and enter the descriptions atop the columns. Hypothesis must be mutually exclusive. 3. List significant evidence down the left hand margin, including absent evidence (list only significant evidence) 4. Working across the matrix, test the evidence for consistency with each hypothesis, one item of evidence at a time. • • Consistent – C Inconsistent - I
Delete any hypothesis that are inconsistent with the evidence.
Consistent – meaning that it could be responsible Inconsistent – unlikely to be responsible or causation • • Confirm the validity of inconsistent evidence Is there an underlying assumption?
5. Refine the matrix by adding or rewording the hypothesis 6. Working downward, evaluate each hypothesis 7. Rank the remaining hypothesis by the weakness of inconsistent evidence. (The hypothesis with the weakest inconsistencies is the most likely)
Tool 10: Devils Advocacy Steps to Devils Advocacy List: 1. Make a list of points that support the view • 2. Make a list of points countering or opposing by providing support of Cons in the Prime Position that Favors it. • Analyze it. Focus on the contrary or opposite viewpoint (diametrically opposed to it) • Favor particular outcomes or solutions in the beginning
Tool 11a: Probability Tree Steps for Developing a Probability Tree: 1. Identify the problem 2. Identify the major decisions and events to be analyzed 3. Construct a decision and events to be analyzed. 4. Construct a decision/event tree portraying all important alternative scenarios 5. Ensure each branch is mutually exclusive and are collectively exhaustive. 6. Assign a probability to each decision/event. Each Branch must equal 1.0 * 7. Calculate the conditional probability of each individual scenario. 8. Calculate the answers to probability questions relating to the decision/event Example of Conditionally Dependent Probability: * In numerical possibilities, an event cannot occur more times than its possibility of occurring. Therefore, probability can NEVER be greater than 1 or 100 percent. Probability Rules (Add or Multiply) OR Type (Add): when the combined probability that two or more events will occur as a result of a single decision (“or”) the event. 0.3 + 0.5 = 0.8 (P1 + P2) AND Type (Multiply): when the probability two or more events will occur in succession (the “and” situation), we multiply their individual probabilities 0.5 x 0.5 = 0.25 (P1 x P2) (Consider two coin tosses)
• • • History of succeeding 9 out of 10 times in the past opening locks 10 Consecutive Doors (open one door to get to the next) Unlock 10 Doors
Use the IS-over-OF Rule to figure out percent.
For a series of connected (conditionally dependent) events you must multiply.
Probability (P ) of opening x door? Probability of opening the 1 door? Is 9 out of 10 or .90 Probability of opening the 2 door? 9 x .91 = .82
Why? 10/11 is .91, you’ve already have 10 down and 11 to go. 3rd door = .82 x 11/12 = .75
Probability (Pn) P1 P2 P3 P4 P5 Calculation 9 /10 0.9 x 10 / 11 0.82 x 11 / 12 0.75 x 12 / 13 0.69 x 13 / 14
Calculated P 0.90 0.82 0.75 0.69 0.64
Multiply the probability of opening the P( 1 door) times the nd P(2 Door) / number of outcomes
Tool 11b: Probability Refresher Terms: An experiment is a well-defined process with observable outcomes. The set or collection of all outcomes of an experiment is called the sample space, S An event E is any collection or subset of outcomes from the sample sample. An event could have just one outcome and hence it is often called a simple event. An event with more than one outcome is called a compound event. Classical definition of probability says that the probability of an event, P(E) is:
The assumption here is that any outcome is just as likely to occur as any other outcome. In the case where E=S, then the numerator and denominator are equal and so the P(S)=1. Look at the following events: C: The card drawn is a club. A: The card drawn is an ace. T: The card drawn is a "one-eyed" three. The number of outcomes in S is 52.
The complement of E is the event consisting of all outcomes in S which are not in E and is often denoted by P(E '). For example:
so both the probability of Not event is equal to the event occurring – 1 therefore: How do you determine probability? • • Computation (deterministic) Frequency/Experience
Frequency is how often an event has occurred in the past; experience is what happened during each event.
Tool 12: Utility Tree Steps to Create A Utility Tree: 1. Identify the options and outcomes to be analyzed 2. Identify the perspectives of the analysis 3. Construct a decision/event tree for each option Elements of a Tree: 4. Assign a utility value to each option-outcome combination – each branch (scenario) of the tree by asking the Utility Question: If we select this option, and this outcome occurs, what is the utility from the perspective of x 5. Assign a probability to each outcome. Determine the estimate this probability by Asking the Probability Question: If this option is selected, what the probability this outcome will occur? (Must add up to 1.0) 6. Determine the expected values by multiplying each utility by its probability and then adding the expected value for each option. 7. Determine the ranking of the alternative solutions. 8. Perform a sanity check • • • • • • • Option Outcome Utility Probability Expected Value Total Expected Value Ranking Answers the question, if we select this option, and this outcome occurs, what is the utility from the perspective of ____? Expected Value is the product (multiplication) of the utility and probability values for a given outcome.
Tool 13: Utility Matrix Steps to Construct a Utility Matrix: 1. Identify the options and outcomes to be analyzed. 2. Identify the perspective of the analysis 3. Construct a Utility Matrix 4. Assign a utility value of 0 to 100 (unless its currency) to each option-outcome combination – each cell in the matrix by 5. Assign a utility value to each option-outcome combination – each branch (scenario) of the tree by asking the Utility Question: If we select this option, and this outcome occurs, what is the utility from the perspective of x 6. Assign a probability to each outcome. Determine the estimate this probability by Asking the Probability Question: If this option is selected, what the probability this outcome will occur? (Must add up to 1.0) 7. Determine the expected values by multiplying each utility by its probability and then adding the expected value for each option. 8. Determine the ranking of the alternative solutions. 9. Perform a sanity check Easier to visualize a utility matrix vs. a utility tree Elements of a matrix: Option Outcome Utility Probability Expected Value (EV) Total EV Rank
Perspective A Option 1 Option 2 Option 3
Total EV C
Tool 14: Advanced Utility Analysis Steps for Creating an Advanced Utility Analysis: 1. Identify the options and outcomes to be analyzed 2. Identify and weight the perspectives to be analyzed 3. Construct an identical utility matrix for each perspective – same options, same outcomes;
• Perform steps 4 -7 with each matrix
This has to be created for EACH of the perspective:
Perspective A Option 1 Option 2 Option 3 Outcomes B Total EV C
Each of the Outcomes are weighted before calculated 4. From each of the matrix’s particular perspective, assign utilities from 0-100 to the outcome of each option-outcome combination (each cell in the matrix). There must be at least one. 5. Assign a probability to the outcome of each optionoutcome combination (each cell) 6. Compute the expected values for each option and enter the totals in the Total EV column 7. Add expected values for each option and enter the totals in the “Total EV” column 8. Construct a single ‘merged’ matrix with the same options as in the perspective matrices. 9. Enter opposite each option the total expected for that option from the perspective matrices 10. Multiply the total expected values under each perspective by perspective’s weight. 11. Add the resulting products (weighted expected values) for each option and enter the sums in the “Total Weighted EV” column 12. Rank the options. The one with the greatest total weighted expected value is the preferred option 13. Perform a sanity check
Perspective A Option 1 Option 2
Perspective A WT 0.8 Singapore 86 x .8 Tokyo 34 x 0.8 Kuala Lumpur 10 x 0.8 90 x 0.1 55 x 0.1 22.5 34 x 0.1 35 x 0.1 37 3 x 0.1 3 x 0.1 69 Outcomes B WT 0.1 Total EV C WT 0.1
All the results will be ranked in the Total Perspective
Perspectives B C Total Weighted EV Rank
Appendix A: Statistics - Probability Determining Relative Frequency (Mathematical Probability) Empirical Method If the process under study can be repeated or simulated many times, we can determine the empirical probability by keeping track of the outcomes in our (large number of) trials. The probability assigned is: P(A happens) = (# times A happened) / (# trials) If the number of trials is very large, then it is quite likely that this will give us a reliable estimate. Theoretical Method Sometimes we can make mathemitical assumptions about a situation and use Four Basic Properties of Probability to determine the theoretical probability of an event. The accuracy of a theoretical probability depends on the validity of the mathematical assumptions made.
The four useful rules of probability are:
1. It happens or else it doesn't. The probability of an event happening added the probability of it not happening is always 1. P(A happens) + P(A doesn't happen) = 1 2. Exclusivity. If A and B can't both happen at the same time (in which case we say that A and B are mutually exclusive), then P(either A or B happens) = P(A happens) + P(B happens) 3. Independence. If B is no more or less likely to happen when A happens than when A doesn't (in which case we say that A and B are independent), then P(A and B both happen) = P(A happens) * P(B happens) 4. Sub-Events. If whenever A happens B must also happen, then B must be at least as likely as A, so P(A happens) <= P(B happens) Empirical probabilities will also follow these rules (for a given set of trials). Because people often have a poor sense of the likelihood of an event, personal probabilities often do not follow these rules. A collection of personal probabilities is called coherent if it does not violate the rules for mathematical probability. Equally likely outcomes
One especially important use of these probability rules is the conclusions that can be drawn if we assume that a number of events are equally likely. If there are only n such events that are possible in a given situation, and all are equally likely and pair-wise mutually exclusive (no two can happen at once), then each must have probability 1/n. More complicated situations can be handled by dividing a situation into a number of equally likely outcomes and counting how many of them are "of interest" (in the event). The probability then is given by (number of interest)/(total number. Example 1: For example, say you're playing with a deck of cards with a friend. Say he challenges you that if you draw an ace on your first pick, he will have to buy you lunch the next day. How good are your chances of winning? Well, this is a probability question. Since there are four aces in 52 cards, your chances of winning are 4/52, or 1/13. So, the probability of you're picking an ace is 1/13, whereas the probability of you not picking an ace is 12/13. The odds are against you, but it isn't completely unlikely. Example 2: Let's take a more complicated example. Let's say you and your friend are playing with two dice. He gives you the same challenge, except this time, he challenges you to roll two sixes. The probability of rolling a six on each die is 1/6, but how about both at the same time? To figure the probability out here, we have to multiply the probability of getting a six on each die. So, we have 1/6 x 1/6, and our probability for rolling two sixes is 1/36. Your chances are even worse here! Example 3: Another interesting thing probability can show you that is somewhat practical is your chances of winning the lottery. If you play one of those 3-digit lottery tickets where you have to guess the 3-digit number exactly, your probability of winning is 1/1000. You can figure this out by noting that the probability of you're getting the first number right is 1/10. The probability of getting all three right is then 1/10 x 1/10 x 1/10. Not too good of a chance! The 4-digit number is even harder! Can you guess what the probability of winning that lottery might be? And even more amazing is the tiny probability of winning those multi-million dollar lotteries. That would be a little trickier to figure out, but it is a slightly different problem. Say there are 70 numbers they pick from. Your chances of getting the first number right is 1/70. But since one ball has been removed, your chances of getting the second number right is 1/69. If there are six numbers picked, can you figure out what the probability of winning this lottery is? (Remember to multiply all of the individual probabilities together... 1/70 x 1/69 x ...etc.)
An event with a probability of 0 is impossible. An event with a probability of 1 is certain. 0 P(A) 1 for any event A.
Probability can be approximated by frequency: P(A) = number of times A occurred divided by number of times experiment is repeated.
Appendix B: Evolution of a Matrix
Perspective 1: Outcome My Monetary Profit War Utility x Probability 100 x .1 = 10 Speculative Stocks options Prosperity Utility x Probability 20 x .36 = 7.2 Recession Utility x Probability 0 x .54 = 0 Total EV Rank
80 x .1 = 8
70 x .36 = 25.2
10 x .54
40 x .1 = 4
40 x .36 = 14.4
40 x 21.6
If you have n perspectives, then you must create a utility matrix for each perspective. Advanced Utility Analysis Matrix
Perspective: Merged War Total EV x Weight (0.2) 17.2 x .2 = 10
Classes of Outcome Prosperity Total EV x Weight (0.5) 2 Person’s Monetary Profit
Recession Total EV x Weight (0.3) 3 Person’s Monetary Profit
Total Weighted EV
Speculative Stocks options
Statistics Refresher: Normal Distribution: Normal curve is a mathematical model of randomness In order to manipulate measures mathematically, we treat them was though they are located at points on a scale. Those points are midpoints of intervals. One reason is that variables are continuous rather than discrete. Median and Mean (Measures of Central Tendency) • • Think of finding the fulcrum to get balance The point in from which all deviations sum to zero; meaning the negative and positive deviations will always cancel each other out
The Mean ( µ) of the ENTIRE population: µ = ∑X / N µ is the mean of the population. X refers to the raw scores N is the size of the population The Mean (X) of the sample: x = ∑X / N Just change symbol for the result to x “hat”; no further calculation is necessary. Can be expressed in formal notation like this:
Instead of sum, you use the product instead; used to calculating rates of growth.
The geometric mean is useful to determine "average factors". For example, if a stock rose 10% in the first year, 20% in the second year and fell 15% in the third year, then we compute the geometric mean of the factors 1.10, 1.20 and 0.85 as (1.10 × 1.20 × 0.85)1/3 = 1.0391 ... and we conclude that the stock rose 3.91 percent per year, on average. Put another way... The question about finding the average rate of return can be rephrased as: "by what constant factor would your investment need to be multiplied by each year in order to achieve the same effect as multiplying by 1.10 one year, 1.60 ied the next, and 1.20 the third?" The answer is the geometric mean . If you calculate this geometric mean you get approximately 1.283, so the average rate of return is about 28% (not 30% which is what the arithmetic mean of 10%, 60%, and 20% would give you).
Measure of Variability (Average, Standard Deviation & Variance): • • The standard deviation is a kind of average of individual deviations from the mean of a distri distribution. The mean serves as an index of variability. It’s the reference point.
AD = ∑ |x| / N • • Average Deviation is the sum of individual deviations (distances) from the mean population. The standard deviation is a summation of the average individual deviation from the mean of the distribution.
More formally, its:
Sample SD is:
is the sample and
is the mean of the sample. 17
To Find Average Deviation (precision of measurement) 1. Find the average value of your measurements. 2. Find the difference between your first value and the average value. This is called the deviation. 3. Take the absolute value of this deviation. 4. Repeat steps 2 and 3 for your other values. 5. Find the average of the deviations. This is the average deviation The average deviation is an estimate of how far off the actual values are from the average value, assuming that your measuring device is accurate. You can use this as the estimated error. Sometimes it is given as a number (numerical form) or as a percentage. To Find Percent Error 1. Divide the average deviation by the average value. 2. Multiply this value by 100. 3. Add the % symbol.
The mean average deviation is the average distance to the mean, i.e the average of |X-mean|. Absolute values have to be used since the average of (X-mean) is zero. The standard deviation uses square instead of absolute value to eliminate the sign. Since this leaves squares the units of measurement, for example the spread of, say, heights in cm. would be an area, square root is applied at the end to recover the original units of measurement.
The z –score: Standard Score
Makes it possible for individuals (raw scores/votes/values) onto a single, common scale and compare it. How? First we need a unit that can be used to compensate for variability in the distribution. To do that, we use a measure of variability. Divide the raw-score units by the standard deviation, so: z = x /S
or more formally: • • • X is a raw score to be standardized σ is the standard deviation of the population μ is the mean of the population
...basically you’re dividing each individual deviation by the standard deviation.
Correlation: Finding Relationships
• • When you want to know the relationships between a set of values (variables) Coefficient of correlation is an index of relationship that is high when there is a strong degree of relationship between variable and low value when the relationship is weak. 1.0 is a perfect correlation. We have to know not only about the strength, but direction as well. Direct or Indirect (Inverse) Note: Any correlation coefficient carries information about two aspects of a relationship: its strength – measured on a scale from zero to unity – and its direction – indicated by the presence of a minus sign.
• • •
Two types of correlation indices: • • Rank-Difference (Spearman) Product-Moment (Pearson) Example of Spearman: Raw Data: The raw data used in this example is shown to left. There are 10 scores. n=10 The first step is to sort this data by the first column. Next, two more columns are created. Both of these are for ranking the first two columns. Notice how the rank of values that are the same is the mean of what their ranks would otherwise be. Then a column "d" is created to hold the differences between the two rank 2 columns. Finally another column "d " should be created. This is just column d squared. After doing this process with the example data you should end up with something like: The values in the d column can now be added to find
The value of n is 10. So these values can now be substituted back into the equation.
Which evaluates to ρ = − 0.175758. In the case of ties in the original values, then this formula should not be used. Instead, the Pearson correlation coefficient should be calculated on the ranks
Regression Analysis: • • Identifying the relationship between a dependent variable and one or more independent variables. A model of the relationship is hypothesized, and estimates of the parameter values are used to develop an estimated regression equation .Its purpose is to take a series of independent variables and determine whether a particular dependent variable is related to the independent variables. Regression analysis is very useful in that it does forecasts that do not rely on time. Dependent variables can rely on many different independent variables. A Regression Line displays how well independent and dependent variables fit together. Points are plotted on a graph, and after regression calculation, a line is drawn that is the "best fit" to the points on the graph. The closer the line is to each point, the stronger the relationship is between the independent and dependent variables. Any future forecast on the dependent variable can be found on the regression line.
For Example: A sales manager may want to determine whether product price, advertising budgets and competitor's prices have any effect on total sales. A regression analysis determines, within a certain error bound, how well the variables "fit" together, and which ones have the most effect on total sales.
A Dependent Variable is the variable that you wish to make forecasts on. In the above example, the dependent variable is Sales. An Independent Variable is one or more variables that you wish to base the forecast of the dependent variable on. In the above example, price, advertising budgets, and competitor price are independent variables.
Suppose you are the manager and you wish to forecast sales for a particular brand of 3-D Video Card. You also wish to know how well the Sales of this particular video card are related to the price of the card. The 6 month snapshot is shown below: Please note the Month is not a variable in the regression, it is in the table to seperate the data, and not used in the actual analysis.
Y = a + bX
where: Y = Dependent Variable(Sales) a = Y-axis Intercept b = Slope of the regression line X = Independent Variable(Price) To calculate a & b we use the following formulas: The formula for a is:
a = (µY) - b(µX)
The formula for b is:
ΣXY – n (µX) (µY) ΣX2 - nX2
In the Above formulas, n is the number of values to be analyses; in this case 6. S stands for the sum, and µX & µY stand for the Arithmetic Mean of all the X and Y values. The calculations are shown below. First we calculate the arithmetic means of X & Y: µY = µX = SX n SY n = = 102 6 $1200 6 = 17 = $200
Next we plug these values into the formulas for a & b b = 19910 - 6(200)(17) 2 245200 - 6(200 ) = -490 = 5200 -0.1
Notice the value of b is negative, which means that the regression line has a decreasing slope a = 17 - (-0.1)200 = 17 + 20 = 37
Now that we have the values of a and b, we can plug these values into our original regression equation. Therefore, our Regression equation is: Y = 37 - 0.1X
You can now use this equation to forecast sales. For example, you would like to forecast how many video cards you will sell if you put the card on sale in September for $145. Simply plug this into the equation to find the Y value. Y = 37 - 0.1(145) = 22.5 Therefore, according to the regression analysis, the forecast for September is between 22 and 23 units sold.