Introduction to Decision Analysis, 3rd Edition

A Practitioner's Guide to Improving Decision Quality by David C. Skinner, Edited by Paul Wicker

Introduction to Decision Analysis

Mr. Skinner originally wrote Introduction to Decision Analysis as a handbook and guide for the Decision Analysis (DA) practitioner in 1995. The 2nd Edition was published in 1999 and quickly became an essential reference for industry as well as a graduate-level textbook for decision analysis courses at many universities. Feedback from students, practitioners, and professors was incorporated into the 3rd Edition, which was released in 2009. The 3rd Edition has significantly upgraded layout and graphics, additional chapters on DA topics, and vignettes pulled from interesting business DA problems.

Introduction to Decision Analysis is recommended for DA consultants, corporate DA practitioners, managers and technical professionals who are responsible for making effective decisions, and for MBA or other graduate-level students.

David draws heavily on his 25 years of experience in consulting, teaching, and starting new businesses. The Editor, Paul Wicker, is also an experienced DA consultant and trainer with an extensive background in oil, gas, and chemicals.

The Second Edition has long been sold out, but I have a few copies left. If you are interested, contact Probabilistic Publishing; list price on the Second Edition was $34.95. Also, Mr. Skinner no longer maintains the TIFOE web site; David's Lecture Notes file is the only on-line resource mentioned in the Second Edition that is available (click link to download).

Publication Information: List price is $59.95.

If you are a student, faculty member, or if you are a member of AACE, INFORMS, DAAG, DAS, SPE, AAPG, ASME, AIChE, ASCE, ACS, IEEE, or if you are a Crystal Ball or @Risk user, we can offer your a 33% discount on this book. Select USA Discount price, which includes shipping.

International Orders: We ship via DHL. Please select the DHL Discount price appropriate for your location.

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ISBN Number is 0-9647938-6-5. Pages: 368. Published January, 2009. Second printing: July, 2009. Third printing: September, 2015.

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Academic Usage

Many universities and colleges are using or have used Introduction to Decision Analysis as a textbook, including Rice University, University of Texas, Northwestern, Baylor, George Mason University, Princeton, Long Island University, Northern Illinois University, University of Southern Florida (USF), Boston College, KAIST, Catholic University, Rochester Institute of Technology, George Washington University, Western Kentucky University, University of Wyoming, KEIO Business School, and Dalhousie University (Halifax).

This book works best at a graduate level, especially as part of an MBA curriculum. Several professors have used it for undergraduate courses but with mixed success.

We have PowerPoint slides containing all of the figures within the third edition, which are useful as a starting point for developing your lectures. Contact us for additional resources.

Reviews (Third Edition)

Reviews (Second Edition)




Introduction to Decision Analysis

About Introduction to Decision Analysis

As mentioned above, the Second Edition of this book was Probabilistic Publishing's first project and it has turned out to be our most successful project. When I was consulting with DSI, several times I would meet new clients and find that they had the book and had "sticky notes" placed throughout it. It is gratifying to produce a product that people actually use.

We are very pleased to be able to offer the Third Edition. This edition literally took several years to produce - Paul Wicker, David, and Probabilistic Publishing started working on it in 2006. I should also mention John Lynn from DuPont - John called me one day after he purchased the first printing of the Second Edition and humbly asked if I would be interested in any corrections he could suggest. I replied positively. We talked for about two hours and I took several pages of notes. For the second printing of the 2nd Edition, we ended up editing 42 of the book's 384 pages based on John's detailed and meticulous review. Thank you, John! (Publishing is a humbling business. Everybody immediately sees errors that you looked at several times and missed.)

We are also grateful for Mike and Debbie Stallsworth who helped us proof the final text of the Third Edition.

Concerning the Third Edition Cover...

If you read about An Introduction to Bayesian Inference and Decision on its web site, you will find that we sometimes have challenges developing our covers.

When we were developing cover concepts for the Third Edition, I took a PowerPoint file of several concepts and showed them to the Rice eMBA class that David was teaching. When I got to the cover shown to the right, all the hands in the class went up, even though I asked them to wait until they'd seen all of the covers before they voted. Therefore I thought we had a winner. But...

David was never comfortable with that cover. Debbie and I realized that even though David couldn't articulate why he didn't like it, David always has a good sense of style and was probably correct. So we went to our local Barnes & Noble bookstore and looked at the business books they were displaying. David was correct - our cover was beautiful but it would not have fit in with the business books. We noted that many books today use gold, red, black, and white, so we combined this with the old cover concept from David's First Edition, and, as they say, the rest is history. David was correct as usual. There are about 50 copies that we had produced as digital proofs, some of which we did end up selling. So if you have one of these, you might ask David to sign it - someday it might become a collector's item!

Old Intro to DA Cover

A Note from the Author, David Skinner

"Since the Second Edition was published in 1999, the world has changed considerably but decision analysis continues to provide huge benefits for many companies who are using it. Some companies who had early success with decision analysis have back-tracked and have had corresponding degradation of financial performance. For many companies, however, decision analysis has been included into the normal business processes and has become a way of conducting business every day.

"When Dave Charlesworth and I first discussed the idea of a decision analysis (“DA”) book written from the viewpoint of a DA practitioner, we thought the book would be successful. However, we could not have predicted that several thousand copies would be sold over the next 10 years. More gratifying even than the sales is that I have observed that many of the books are on people’s bookshelves and are well-worn, with yellow “sticky” notes hanging out the side! The book was designed to be a useful reference, and it has been fulfilling that purpose.

"The second edition was not designed with academic usage in mind, however, several professors have used it successfully for executive MBA programs. Their feedback has been incorporated into this edition.

"I’m very grateful to my clients, DSI colleagues, the DA community, and my friends and family for the encouragement and support that they have provided since the Second Edition was published ten years ago. I’d also like to thank Paul Wicker for his thorough and professional editing and Dave and Debbie Charlesworth for their consistent support with the publication. If you have comments, please e-mail me at skinnerdc at aol.com."


From the Book: Table of Contents


    1 Introduction .............................................................. 1
      1.1 My Most Difficult Decision ........................................................... 1
      1.2 Making Tough Decisions is Not Easy ................................................... 3
      1.3 What is Decision Analysis? ........................................................... 7
      1.4 The Origins of Decision Analysis ..................................................... 9
      1.5 Why Use Decision Analysis? .......................................................... 10
      1.6 Applying Decision Analysis .......................................................... 11
      1.7 The General Decision Analysis Process ............................................... 13
      1.8 Understanding Some Basic Terminology ................................................ 14
      1.9 Overview of this Book ............................................................... 16
    2 Decision Making in a Complex World ....................................... 19
      2.1 Why are Decisions Difficult? ........................................................ 20
      2.2 Consequences, Uncertainty, and Ambiguity ............................................ 25
      2.3 A Scalable Process: Uncertainty and Ambiguity ....................................... 30
      2.4 Real World Decisions ................................................................ 34
      2.5 The Role of Decision Analysis ....................................................... 38
    3 Uncertainty and Making Choices ........................................... 41
      3.1 Decisions and Uncertainty ........................................................... 42
      3.2 Measures of Merit ................................................................... 45
      3.3 Time Value of Money ................................................................. 47
      3.4 Dealing with Risk ................................................................... 50
      3.5 The Certain Equivalent .............................................................. 54
      3.6 Principles of Evaluations ........................................................... 56
      3.7 Using Distinctions .................................................................. 61
      3.8 Defining Possibilities .............................................................. 63
    4 Making Compelling Decisions .............................................. 69
      4.1 The Decision Elements ............................................................... 72
      4.2 Why We Have Difficulty Achieving High-Quality Decisions ............................. 79
      4.3 How Do You Achieve Decision Quality? ................................................ 83
      4.4 The Ten Principles Of Good Decision-Making .......................................... 85
      4.5 How Do You Measure Decision Quality? ................................................ 89
   5 The Scalable Decision Process ............................................. 95 
      5.1 Is SDP Different than Traditional Decision Analysis? ................................ 95
      5.2 Structuring Phase ................................................................... 98
      5.3 Evaluation Phase ................................................................... 103
      5.4 Agreement Phase .................................................................... 107
   6 Creating a Shared Understanding of the Problem ........................... 113
      6.1 Framing the Problem ................................................................ 113
      6.2 The Participants in the Process .................................................... 114
      6.3 Developing an Appropriate Frame .................................................... 116
      6.4 Creating Alternatives .............................................................. 121
      6.5 Preparing for Evaluation ........................................................... 125
   7 Developing a Decision Model .............................................. 129
      7.1 Building Influence Diagrams ........................................................ 130
      7.2 Decision Trees ..................................................................... 137
      7.3 Computer Modeling Programs ......................................................... 141
   8 An Introduction to Probability ........................................... 145
      8.1 What is Probability? ............................................................... 145
      8.2 Probability Basics ................................................................. 150
      8.3 Venn Diagrams ...................................................................... 152
      8.4 States of Information .............................................................. 153
      8.5 Probability Trees .................................................................. 154
      8.6 Reversing the Tree ................................................................. 156
      8.7 Using and Understanding Distributions .............................................. 158
   9 Using Simulation to Solve Decision Problems .............................. 165
      9.1 What is a Monte Carlo Simulation? .................................................. 165
      9.2 Why Use Monte Carlo Simulation? .................................................... 166
      9.3 Using Random Numbers to Simulate Reality ........................................... 167
      9.4 Using the Results of a Monte Carlo ................................................. 171
      9.5 Commercial Software ................................................................ 173
      9.6 The Role of Monte Carlo ............................................................ 175
  10 Using Uncertain Information and Judgment ................................. 181
     10.1 Using Limited Information .......................................................... 182
     10.2 Gathering Information .............................................................. 182
     10.3 Uncovering and Dealing with Biases ................................................. 184
     10.4 Assessing Information .............................................................. 187
     10.5 Using Probability as the Language of Uncertainty ................................... 189
     10.6 Discretizing the Information ....................................................... 190
  11 Gaining Insight Through Evaluation ....................................... 197
     11.1 Deterministic Sensitivity Analysis ................................................. 198
     11.2 Probabilistic Evaluation ........................................................... 200
     11.3 Value of Information ............................................................... 203
     11.4 Applying an Appropriate Risk Attitude .............................................. 207
  12 Getting to Agreement ..................................................... 225
     12.1 Agreement and Implementation ....................................................... 225
     12.2 Developing a Decision Quality Package .............................................. 229
     12.3 Preparing the Organization ......................................................... 230
  13 A Thirty-minute Guide to Better Decisions ................................ 235
     13.1 Company Background ................................................................. 235
     13.2 The Process ........................................................................ 236
     13.3 Pre-Project Planning ............................................................... 238
     13.4 Kickoff Meeting .................................................................... 239
     13.5 Structuring Phase .................................................................. 242
     13.6 Evaluation Phase ................................................................... 247
     13.7 Decide on a Course of Action ....................................................... 251
     13.8 Allocate the Appropriate Resources ................................................. 252
     13.9 Integrate the Course of Action ..................................................... 252
  14 Using the Scalable Decision Process on Large Projects .................... 253
     14.1 Understanding SDP .................................................................. 254
     14.2 Structuring Stage .................................................................. 257
     14.3 Evaluation Stage ................................................................... 271
     14.4 Agreement Stage .................................................................... 278
  15 Portfolio Analysis and Management ........................................ 283
     15.1 Introduction to Portfolio Analysis and Management .................................. 283
     15.2 Portfolio Management System Objective .............................................. 284
     15.3 Strategy and Portfolio Management .................................................. 286
     15.4 Effective Portfolio Analysis and Management ........................................ 287
     15.5 Creating and Testing Balance Within the Portfolio .................................. 290
     15.6 Selecting the Right Portfolio Management Tools ..................................... 291
     15.7 Efficient Frontiers ................................................................ 293
     15.8 The End Result of a Portfolio Analysis and Management System ....................... 295
  16 Implementing the Decision Analysis Process ............................... 299
     16.1 Implementing Decision Analysis ..................................................... 301
     16.2 What is Right for Your Organization? ............................................... 306
     16.3 Implementation Issues .............................................................. 309
     16.4 Real World Problems ................................................................ 310
     16.5 Implications and Reactions ......................................................... 311
  Appendices
   Decision Response Inventory Exercise (DRIVE) ................................ 315
   Facilitation and Analysis Summaries ......................................... 320
     Eliciting Issues ........................................................................ 320
     Decision Hierarchy ...................................................................... 321
     Influence Diagrams ...................................................................... 322
     Strategy Table .......................................................................... 323
     Assessment .............................................................................. 324
     Decision Trees .......................................................................... 325
     Decision Quality Radar Chart............................................................. 326
  Glossary ..................................................................... 327
  Answers to Selected Questions ................................................ 330
  About the Author ............................................................. 343
  Index ........................................................................ 345