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The Value of Information. Using risk to guide decision-making under uncertainty NWHA Annual Conference February 2014. xkcd.com. Darin E. Johnson BIS Consulting. Problem summary. Upgrade of a hydro-generation facility. Two-unit plant with space for a third.
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The Value of Information • Using risk to guide decision-making under uncertainty • NWHA Annual Conference • February 2014 xkcd.com Darin E. Johnson BIS Consulting
Problem summary • Upgrade of a hydro-generation facility. Two-unit plant with space for a third. • Option 1 – upgrade the existing units. • Option 2 – upgrade existing and install a third, smaller unit
Initial results of the economic analysis Option 1looks better by $3 million… …but there is still a lot of uncertainty.
Another way to look at it • Overlap of the curves represents the “cost to reject” an option. • The risk that we will regret selecting one option. • Cost to reject Option 2 - $4.6 million. $4.6 million risk
What are the sources of our uncertainty? • Construction cost estimates • Performance of units - future water and dispatch. • Failure rates and consequences. • Energy prices. • License, regulation. • Fish passage. • Others? Some of these we can improve, others we can’t
What if we collect more information? What we expect to happen: • Curve narrows, but stays in the same location. What might happen: • Curve narrows and moves to the right. We now prefer Option 2 Solution?: • Look at all possibilities; weight them.
Here is where we see the value of information • Where we are now… • Option 1 looks better, but there is a lot of overlap. • Risk from rejecting worse option: $4.6 million. • Where we could be… • We do some work to reduce uncertainty for one or both options. • Risk is reduced – in this example, to $1.7 million. If we can do this work for less than $2.9 million, it is worthwhile.
What can we take away from this? • As always, spending decisions should be based on whether benefits exceed costs. • Develop a problem statement and put it in a cost/benefit framework as soon as possible. • Don’t worry if you’re uncertain. Focus on bounding your uncertainty – ask experts for maximum and minimum values. • Remember – information is a means to an end. • Compare the decision you would make today with the range of decisions you might make if you had better information. • Pursue further information only if it reduces cost.
