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Value of Information in Portfolio Decision Analysis

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  • Jeffrey Keisler

    (University of Massachusetts, Boston, Massachusetts 02125)

Abstract

It can be time consuming to use decision analysis to allocate resources over a portfolio of projects. It may be possible to attain most of the value added by decision analysis in significantly less time. This paper defines and compares different analytic strategies in terms of the resulting value added for a range of simulated portfolios. A portfolio consists of a set of candidate projects or investments of uncertain value. The value of each project may be estimated with or without the additional information provided by decision-analytic methods. Projects are then completely prioritized and funded in order of the ratio of their expected net present value to their cost, or partially prioritized and funded whenever this ratio exceeds a predefined threshold level. The portfolio funded under the various analytic strategies is compared against a strawman alternative of random funding decisions. The value added through disciplined prioritization often exceeds the additional value added through the more costly step of developing refined estimates of project values. Intermediate approaches, including threshold approaches and the application of triage rules to determine which projects to analyze, are found to be useful but not robust.

Suggested Citation

  • Jeffrey Keisler, 2004. "Value of Information in Portfolio Decision Analysis," Decision Analysis, INFORMS, vol. 1(3), pages 177-189, September.
    • Handle: RePEc:inm:ordeca:v:1:y:2004:i:3:p:177-189
    DOI: 10.1287/deca.1040.0023
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    References listed on IDEAS

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    1. Robert T. Clemen & Robert C. Kwit, 2001. "The Value of Decision Analysis at Eastman Kodak Company, 1990-1999," Interfaces, INFORMS, vol. 31(5), pages 74-92, October.
    2. Ronald A. Howard, 1988. "Decision Analysis: Practice and Promise," Management Science, INFORMS, vol. 34(6), pages 679-695, June.
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    Cited by:

    1. Vilkkumaa, Eeva & Liesiö, Juuso & Salo, Ahti, 2014. "Optimal strategies for selecting project portfolios using uncertain value estimates," European Journal of Operational Research, Elsevier, vol. 233(3), pages 772-783.
    2. L. Robin Keller & Ali Abbas & Manel Baucells & Vicki M. Bier & David Budescu & John C. Butler & Philippe Delquié & Jason R. W. Merrick & Ahti Salo & George Wu, 2010. "From the Editors..," Decision Analysis, INFORMS, vol. 7(4), pages 327-330, December.
      • L. Robin Keller & Manel Baucells & Kevin F. McCardle & Gregory S. Parnell & Ahti Salo, 2007. "From the Editors..," Decision Analysis, INFORMS, vol. 4(4), pages 173-175, December.
      • L. Robin Keller & Manel Baucells & John C. Butler & Philippe Delquié & Jason R. W. Merrick & Gregory S. Parnell & Ahti Salo, 2008. "From the Editors..," Decision Analysis, INFORMS, vol. 5(4), pages 173-176, December.
      • L. Robin Keller & Manel Baucells & John C. Butler & Philippe Delquié & Jason R. W. Merrick & Gregory S. Parnell & Ahti Salo, 2009. "From the Editors ..," Decision Analysis, INFORMS, vol. 6(4), pages 199-201, December.
    3. Gary J. Summers, 2021. "Friction and Decision Rules in Portfolio Decision Analysis," Decision Analysis, INFORMS, vol. 18(2), pages 101-120, June.
    4. Kun Zan & J. Eric Bickel, 2013. "Components of Portfolio Value of Information," Decision Analysis, INFORMS, vol. 10(2), pages 171-185, June.
    5. L. Robin Keller & Kelly M. Kophazi, 2012. "From the Editors ---Copulas, Group Preferences, Multilevel Defenders, Sharing Rewards, and Communicating Analytics," Decision Analysis, INFORMS, vol. 9(3), pages 213-218, September.
    6. Mancuso, A. & Compare, M. & Salo, A. & Zio, E., 2021. "Optimal Prognostics and Health Management-driven inspection and maintenance strategies for industrial systems," Reliability Engineering and System Safety, Elsevier, vol. 210(C).
    7. Tom Pape, 2020. "Value of agreement in decision analysis: Concept, measures and application," Papers 2012.13816, arXiv.org.
    8. Carlo Drago & Matteo Ruggeri, 2019. "Setting research priorities in the field of emergency management: which piece of information are you willing to pay more?," Quality & Quantity: International Journal of Methodology, Springer, vol. 53(4), pages 2103-2115, July.
    9. Yeawon Yoo & Adolfo R. Escobedo, 2021. "A New Binary Programming Formulation and Social Choice Property for Kemeny Rank Aggregation," Decision Analysis, INFORMS, vol. 18(4), pages 296-320, December.
    10. Thomas Weber, 2010. "Simple methods for evaluating and comparing binary experiments," Theory and Decision, Springer, vol. 69(2), pages 257-288, August.
    11. Chidambaram Subbiah & Andrea C. Hupman & Haitao Li & Joseph Simonis, 2023. "Improving Software Development Effort Estimation with a Novel Design Pattern Model," Interfaces, INFORMS, vol. 53(3), pages 192-206, May.
    12. Pape, Tom, 2017. "Value of agreement in decision analysis: concept, measures and application," LSE Research Online Documents on Economics 68682, London School of Economics and Political Science, LSE Library.
    13. L. Robin Keller, 2008. "From the Editor..," Decision Analysis, INFORMS, vol. 5(3), pages 113-115, September.
    14. Euan Barlow & Alec Morton & Saudamini Dabak & Sven Engels & Wanrudee Isaranuwatchai & Yot Teerawattananon & Kalipso Chalkidou, 2022. "What is the value of explicit priority setting for health interventions? A simulation study," Health Care Management Science, Springer, vol. 25(3), pages 460-483, September.
    15. Lahtinen, Tuomas J. & Hämäläinen, Raimo P. & Jenytin, Cosmo, 2020. "On preference elicitation processes which mitigate the accumulation of biases in multi-criteria decision analysis," European Journal of Operational Research, Elsevier, vol. 282(1), pages 201-210.
    16. Rakesh K. Sarin, 2013. "From the Editor —Optimal Betting, Reducing Unnecessary Mammography in Breast Cancer Diagnosis, Product Line Design, and Value of Information," Decision Analysis, INFORMS, vol. 10(3), pages 187-188, September.
    17. Anthony Michael Barrett, 2017. "Value of Global Catastrophic Risk (GCR) Information: Cost-Effectiveness-Based Approach for GCR Reduction," Decision Analysis, INFORMS, vol. 14(3), pages 187-203, September.
    18. Salo, Ahti & Doumpos, Michalis & Liesiö, Juuso & Zopounidis, Constantin, 2024. "Fifty years of portfolio optimization," European Journal of Operational Research, Elsevier, vol. 318(1), pages 1-18.
    19. Richard A. Moynihan & Robert C. Reining & Patricia P. Salamone & Brian K. Schmidt, 2009. "Enterprise scale portfolio analysis at the national oceanic and atmospheric administration (NOAA)," Systems Engineering, John Wiley & Sons, vol. 12(2), pages 155-168, June.
    20. Peter I. Frazier & Warren B. Powell, 2010. "Paradoxes in Learning and the Marginal Value of Information," Decision Analysis, INFORMS, vol. 7(4), pages 378-403, December.
    21. Rakesh K. Sarin & L. Robin Keller, 2013. "From the Editors ---Group Decisions, Preference Elicitation, Experienced Utility, Survival Probabilities, and Portfolio Value of Information," Decision Analysis, INFORMS, vol. 10(2), pages 99-102, June.

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