Chapter 5

(Sensitivity Analysis)

Sensitivity analysis is used through the entire modeling process.

Purpose of sensitivity analysis

• To analyze what really matters in the decision problem.

• To construct a requisite decision model.

Example of sensitivity analysis

• Determine if deterministic dominance or stochastic Dominance is present.

• Identifying the important variables through tornado diagrams.
• Identify interaction effects between important variables.
• Identify the importance of probability assessments (which are also variables).

Solving the wrong problem:

• Problem Identification Level

• Error of the 3rd kind.
• To avoid this error: Continue to be skeptical about the problem on the surface being the real
problem.

Dominance Considerations:

• Problem Structure Level

• Ask whether one alternative could end up better than another. If not ignore that alternative.

Importance of variables: (One-way sensitivity analysis):

• One-way sensitivity analysis ignores the effect of changing multiple variables a t the same time.
• Steps:
1. Determine a range for every decision variable and a best guess ( Base, High) and calculate as a
first cut sensitivity analysis, the output variable using first all the low value s for the input
variables and second all the high values for the input variables:

‫ لكل قيمة فيهم‬output variable ‫ وبعدها نحسب ال‬،)‫ (احسن قيمة – اسوأ قيمة – القيمة االساسية‬variable ‫حدد لكل‬
2.
1. Select a particular variable free variable.
2. Set all other variables to their best guesses (=base values).
3. Set free variable to its lowest value and calculate payoff.
4. Set free variable to its highest value calculate payoff.
5. Set free variable to some intermediate values and calculate payoff.
6. Draw results in a one-way sensitivity analysis graph.
free ‫ التانية هنحطها بالقيمة االساسية ليها معادا ال‬variables ‫ كل قيم ال‬،free variable ‫ واحد ونسميه‬Variable ‫هنحدد‬
‫ ومره بالقيمة االساسية‬payoff ‫ ومره باسوأ قيمة ونحسب ال‬payoff ‫ مره هنعمل باحسن قيمة ونحسب ال‬variable
one-way sensitivity analysis graph ‫ وبعدين نرسم‬payoff ‫ونحسب ال‬

(Base-Best-Worst) free variable ‫ مقابل قيمة‬payoff‫الخط االزرق هو قيمة ال‬

3. Perform a one-way sensitivity analysis is for all variables and plot results in a Spider Diagram

Spider Diagram ‫عشان نرسم‬

a one-way ‫االول بنعمل‬
‫ لكل ال‬sensitivity analysis
‫ونحطهم كلهم فنفس‬variables
‫ طيب ازاي نرسمهم كلهم‬..‫الجراف‬
‫ بتاعتهم مختلفة؟‬measures ‫وال‬

‫ جديد بيتقاس‬measure ‫بنعملهم‬

‫على نسبة اختالف القيمة من ال‬
base value

‫ ال‬Hours flown ‫يعني مثال ال‬

‫ وال‬800 ‫ ليها‬base value
500 worst

% = [(800-500)/800]*100 = 38%
 4. Calculated payoff range is a measure of uncertainty in payoff due to uncertainty in the free
variable Plot the payoff ranges in a Tornado Diagram and visually determine the important
variables:
• The most sensitive variable the one with the longest bar is at the top the least sensitive
is at the bottom with the bars arranged in this order.
‫بنرسم خط يبين تغير قيمة ال‬
variables ‫ بتغيرقيم ال‬payoff
one-way ‫(اللي جبناها من‬
‫) ومنه بنعرف ايه ال‬analysis
‫ صاحب أكبر تأثير‬variable
payoff ‫فال‬

Two-Way Sensitivity Analysis:

• Steps:
1. Determine Objective Variable as a function for both variables.
Objective ‫ وبجيب قيمة ال‬Tornado Diagram ‫ فال‬Sensitivity ‫ بتوعنا ودول اللي كام ليهم اعلى‬variables ‫بنحدد ال‬
‫ بتاعي بداللتهم‬Variable
2. Set all other parameters at their base values.
‫ بتوعي‬two variables ‫ معادا ال‬base value ‫ بال‬variables ‫في المعادلة بعوض بقيم كل ال‬
3. For what values of both variables is outcome of alternative 1 worse than is outcome of
alternative 2. Hence for what values of both variables is the following true.
outcome 1 < outcome 2
)alternative 1 ‫ بتاعي لو اختارت‬Objective Variable ‫ (عشان هي قيمة ال‬outcome 1 ‫بعوض بالمعادلة بتاعتي ك‬
‫ اللي تحقق الشرط ده‬two variables ‫ واطلع العالقة بين ال‬outcome 2 ‫وبقارنها (<) بقيمة‬
4. Draw graph of values of both variables such that one is indifferent between the two alternatives.
)‫ متساويين‬2 outcomes ‫ (لما بيكون ال‬indifferent curve ‫برسم ال‬
5. Determine which alternative is preferred above and below the indifference curve.
‫ االفضل في كل قيمة من‬alternative ‫ وتحته (يعني بحدد ال‬indifference curve ‫ االفضل فوق ال‬alternative ‫بحدد ال‬
.base case values ‫ فال‬outcome ‫) – كمان بنرسم نقطة تعبر عن ال‬two variables ‫قيم ال‬

...‫** راجع مسألة المحاضرة مع تطبيق الخطوات دي‬

Sensitivity Analysis with Probability:

• Create a two-way sensitivity graph that shows optimal strategies for Objective Variable for possible
values of p and q.
• For a p < v1 and q > v2 values, can he make a decision without further probability assessment.
• Steps:

1. Define each strategy and its EMV with respect to p and q

2. Construct inequalities (no. inequalities = no. strategies),
3. Assume EMV(S1) > EMV(S2), EMV(S1) > EMV(S3), EMV(S2) > EMV(S3), …
4. Plot these inequalities as lines on a graph with p on the vertical axis and q on the horizontal axis.
5. Those N lines will separate the graph into N+1 areas, Conduct the best strategy in each graph
area.
6. For the given p < v1 and q > v2 values detect the strategy that is better in the area of this values.

Uncertainty Analysis:

• One-way sensitivity analysis and two-way sensitivity analysis acknowledge that output
parameters are uncertain by indicating a range for the different input variables.
• In uncertainty analysis Parameters are uncertain as indicated by assessing a range by specifying
probability distributions for uncertainty of input parameters we assess how uncertain these
parameters are.
• Given the uncertainty distribution of the input parameters and the calculation model the
uncertainty distribution of the output parameters is fixed.