Session 12

Decision Making & Risk Analysis

Regression Model
&
Delphi Model

12-15

Regression Analysis
Purpose: to determine the regression
equation; it is used to predict the value of
the dependent variable (Y) based on the
independent variable (X).
Procedure: select a sample from the
population and list the paired data for each
observation; draw a scatter diagram to
give a visual portrayal of the relationship;
determine the regression equation.

12-19

Assumptions Underlying Linear

Regression
For each value of X, there is a group of Y values,
and these Y values are normally distributed.
The means of these normal distributions of Y
values all lie on the straight line of regression.
The standard deviations of these normal
distributions are equal.
The Y values are statistically independent. This
means that in the selection of a sample, the Y
values chosen for a particular X value do not
depend on the Y values for any other X values.

12-16

Regression Equation
the regression equation: Y= a + bX, where:
Y is the average predicted value of Y for any X.
a is the Y-intercept, or the estimated Y value
when X=0
b is the slope of the line, or the average change in
Y for each change of one unit in X
the least squares principle is used to obtain a &
b:
n( XY ) ( X )( Y )
n( X 2 ) ( X ) 2
Y
X
a
b
n
n

Beta is the Slope of an Ordinary

Least Squares Regression Line

Returns of Share, %
pa

Share Returns Regressed On Market

Returns

-0.10

0.12
0.10
0.08
0.06
0.04
0.02
-0.05

0.00
-0.020.00

0.05

0.10

-0.04

Returns on Market, % pa

0.15

0.20

Beta
Beta is a relative measure of risk-the risk of an
individual stock relative to the market portfolio
of all stocks.
Beta measures a security's volatility, or
fluctuations in price, relative to a benchmark,
the market portfolio of all stocks.
Stocks with high betas are said to be high-risk
securities.

12-17

EXAMPLE 2
Book
Develop a regression
equation for the
1
information given in table
2
below that can be used
3
to estimate the selling
price based on the
4
number of pages.
5

Pages Cost $
500

28

700

25

800

33

600

24

400

23

500

27

600

21

800

31

Result

By the least squares principle, b=.01714

and a=16.00175
Y =16.00175 + .01714X

Exercise:
Forecast Housing Starts with
Analysis

Time-Series

Using the following housing starts data in thousand units

from1993-1 to 1998-4 forecast the demand for each quarter of
1999.

Delphi Technique

What is the Delphi Technique?

The term Delphi has its origin in the Oracle of Delphi.
the Delphi method is based on the belief that group
judgments are mature, well-considered and more valid
than individual judgments.
It is said that the Delphi Technique was originally
thought of as a way to obtain the thoughts and
opinions of experts and professionals by letting them
interact face to face.
The Delphi Technique may be defined as a unique
method for arriving at a well thought-out consensus
among experts.

History of Delphi
The Delphi method belongs to the subjectiveintuitive methods of foresight.
Delphi was developed in the 1950's by the
Rand Corporation, Santa Monica, California, in
operations research.

Definition of Delphi
The Delphi method is based on structural surveys and
makes use of the intuitive available information of the
participants, who are mainly experts.
It de-livers qualitative as well as quantitative results and
has beneath its explorative, predictive even normative
elements.
There is not the one Delphi methodology but the
applications are diverse.
There is agreement that Delphi is an expert survey in two
or more 'rounds in which in the second and later rounds of
the survey the results of the previous round are given as
feedback.

Definition of Delphi
After each survey round, a standard feedback
about the statistical group judgment calculated
from median and quartiles of single prognoses is
given and if possible, the arguments and
counterarguments of the extreme answers are fed
back...'
Therefore, the experts answer from the second
round on under the influence of their colleagues'
opinions.

Definition of Delphi
It is a survey which is steered by a monitor group,
comprises several rounds of a group of experts,
who are anonymous among each other and for
whose subjective-intuitive prognoses a consensus
is aimed at.
Thus, the Delphi method is a 'relatively strongly
structured group communication process, in
which matters, on which naturally unsure and
incomplete knowledge is available, are judged
upon by experts',

Characteristics of Delphi
Content of Delphi studies are always issues about
which unsure respectively incomplete knowledge
exists. Otherwise there are more efficient methods for
decision making.
Delphi are judgment processes with unsure aspects.
The persons involved in Delphi studies only give
estimations.
For the participation experts are to be involved who on
the basis of their knowledge and experience are able
to assess in a competent way. During the rounds, they
have the opportunity to gather new information.
Delphi tries to make use of self-fulfilling and selfdestroying prophecies in the sense of shaping or even
'creating' the future.

Use of a Delphi
The Delphi method is mainly used when long-term
issues have to be assessed.
it is a procedure to identify statements (topics) that are
relevant for the future, it reduces the tacit and complex
knowledge to a single statement and makes it possible
to judge upon.
It is a method for structuring a group communication
process to facilitate group problem solving and to
structure models.
The Delphi method can be used when there is
incomplete knowledge about a problem or
phenomena.

Use of a Delphi
The method can also be used as a judgment, decision-aiding or
forecasting tool and can be applied to program planning and
administration
The method can be applied to problems that do not lend
themselves to precise analytical techniques but rather could
benefit from the subjective judgments of individuals on a
collective basis and to focus their collective human intelligence
on the problem.
The Delphi is used to investigate what does not yet exist
The Delphi method is a mature and a very adaptable research
method used in many research arenas by researchers across
the globe.

Use of Delphi in PM
The Delphi Method has many uses in project
management. You can use the Delphi Method for
any activity that requires the convergence of expert
thought, such as in:
Risk Management: For identifying risks and
quantifying risks.
Time Management: For estimating stories or work
activities.

How to organize a Delphi process?

There are certainly different possibilities to organise a
Delphi process.
Before starting, you should answer the following
questions:
What is my objective?
How many resources (manpower, money...) do I
have?
Is Delphi the right choice?
How can I formulate the statements?
What are my questions?

Important Questions to conduct a

Delphi Analysis

What should be the breadth of the study?

How many and which fields should I ask for?
How will the organization be? Who manages the process?
Who will be invited to participate (active or non-active)?
What results can be expected?
What are the questions asked?
How is the questionnaire designed?
What kind of analysis need to be possible?
How do you intend to implement the results?
Will there be follow-up activities (public relations, publications,
workshops,
presentations, conferences etc.)?
(These questions should be considered as early as possible).

Organization of a Delphi survey

Three Round Delphi Process

Main Steps of Delphi

Step 1. Determination and formulation of questions.
Step 2. Selection of experts
Step 3. Formulation of a first questionnaire that is sent to the
experts
Step 4. Analysis of the answers to the first questionnaire
Step 5. Formulation of a second questionnaire that is sent to
experts
Step 6. Sending of a third questionnaire
Step 7: Summary of the process and drawing up of the final
report

Delphi Method Design

Considerations
1) Methodological Choices
(Quantitative or Qualitative)
2) Initial Question Broad or Narrow

The initial round, one is more likely to get a broader

range of responses than if a narrow set of questions
were to focus the collective intelligence of the
research participants.
The tradeoff, however, is that more data is likely to be
collected with broad, open-ended questions requiring
more time consuming analysis.
Focused or broad questions, is a significant decision
that needs to be made early in the research design
phase.

Delphi Method Design

Considerations
3) Expertise Criteria
The Delphi participants should meet four expertise
requirements:
i) knowledge and experience with the issues under
investigation;
ii) capacity and willingness to participate;
iii) sufficient time to participate in the Delphi; and,
iv) effective communication skills

Delphi Method Design

Considerations
4) Number of Participants:

There are no hard and fast rules, a number of factors

should be considered:
Heterogeneous or homogeneous sample:
where the group is homogeneous, then a smaller
sample of between ten to fifteen people may yield
sufficient results. However, if disparate groups are
involved (e.g. an international study), then a larger
sample will likely be required and several hundred
people might participate.

Delphi Method Design

Considerations
Decision quality/Delphi manageability tradeoff:
There is a reduction in group error (or an increase in
decision quality) as sample size increases.

Internal or external verification:

The larger the group, the more convincingly the results
can be said to be verified. However, a smaller sample
might be used, with results verification conducted with
follow-up research.

Delphi Method Design

Considerations
5) Number of Rounds:
The number of rounds again is variable and
dependent upon the purpose of the research.
Delbecq, Van de Ven and Gustafson (1975) suggest
that a two or three iteration Delphi is sufficient for most
research.
If group consensus is desirable and the sample is
heterogeneous, then three or more rounds may be
required.

Delphi Method Design

Considerations
6) Methodological Rigor
Methodological rigor is a cornerstone of good
research: sloppy research produces sloppy results.
Rigor is critical to both quantitative and qualitative
research.
Rigor is improved when the researcher leaves an
audit trail. This is a clear decision trail of all key
theoretical, methodological and analytical decisions
made in the research from beginning to end.
Audit trails help to substantiate trustworthiness of the
research.

Weakness
Delphi survey are only as valid as the opinions of the
experts involved
The key problems reported include: poor internal
consistency and reliability of judgements among
experts, and therefore low reproduce ability of
forecasts based on the results elicited; sensitivity of
results to ambiguity and respondent reactivity in the
questionnaires used for data collection; difficulty in
assessing the degree of expertise held by participating
experts.
The Delphi Technique session is relatively expensive
to conduct.

Weakness
It requires the time of a large group of participants,
usually senior management. The iterative process is
more time consuming than other problem solving
techniques.
Although the Delphi Technique promotes consensus
and identification of all information categories, it may
suppress important individual differences.

Rating Techniques
Token Approach:
One approach is to assign participants tokens or
points. For example, assume each participant is
assigned 100 tokens. The tokens can be
divided up among the items in any way to total
100. If a participant feels very strongly about an
item, he or she may assign all 100 points to that
item.

Rating Techniques
Rank / Numbering approach:
Another approach is to rate items from most important
being assigned the number one to the least important
being assigned the number equal to the number of
items in the list.
For example, for a list of six items, rate the most
important item number one down to the least
important number six.

Record each participants ratings in a

spreadsheet

Example Spreadsheet
(Results After First Rating

Example Contd.
Take a break.
Take a 15 minute break while the facilitator calculates
the mean, minimum, maximum, and standard
deviation for each item in the list.
Hand out the statistics to all participants.
Allow time for discussion. The discussion is important
because it gives those who have strong opinions the
opportunity to speak. Participants also have the
opportunity to explain to the group why they agree or
disagree with the ratings.

Example Spreadsheet
(Results After Second Rating Round)

Example Contd
Repeat the rating process until the standard
deviations are very low. The low standard
deviations result from people's tendency to vote
with the majority. In this example spreadsheet,
most standard deviations are less than one after
the third rating.

Example Spreadsheet
(Results After Third Rating Round)

Selection of Items
Select the top items (i.e., the ones with the
highest mean) to focus work efforts. Note that
we focused on the standard deviations to help
determine whether we were closer to reaching
consensus. It is, however, ultimately the mean
that is used to determine the top items. Once
the final spreadsheet is sorted in ascending
order of mean, we can determine the top items.

Results After Third Rating

(Sorted by Mean)

Conclusion
In this case, the participants agree that their top
priority is to increase penetration of the product
within the customers' environments.
The Delphi Technique builds consensus. People
feel ownership for the item rated most important.
This is because all participants have an
opportunity to make his or her point and hear the
opinions of others.