Decision and Risk Analysis

AnalyticalHierarchyProcess(AHP)
bySaaty
Anotherwaytostructuredecisionproblem
Usedtoprioritizealternatives
Usedtobuildanadditivevaluefunction
Attemptstomirrorhumandecisionprocess
Easytouse
Wellacceptedbydecisionmakers
Usedoftenfamiliarity
Intuitive
Canbeusedformultipledecisionmakers
Verycontroversial!
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Decision and Risk Analysis

Whatdowewanttoaccomplish?
LearnhowtoconductanAHPanalysis
Understandthehowitworks
Dealwithcontroversy
Rankreversal
Arbitraryratings
Showwhatcanbedonetomakeituseable
BottomLine:AHPcanbeausefultool...butitcantbe
usedindiscriminately!

Decision and Risk Analysis

AHPProcedureBuildtheHierarchy
Verysimilartohierarchicalvaluestructure
Goalontop(FundamentalObjective)
Decomposeintosubgoals(Meansobjectives)
Furtherdecompositionasnecessary
Identifycriteria(attributes)tomeasureachievementof
goals(attributesandobjectives)
Alternativesaddedtobottom
Differentfromdecisiontree
Alternativesshowupindecisionnodes
Alternativesaffectedbyuncertainevents
Alternativesconnectedtoallcriteria
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Decision and Risk Analysis

BuildingtheHierarchy
Note:Hierarchycorrespondstodecisionmakervalues
Norightanswer
Mustbenegotiatedforgroupdecisions
Affinity
Diagram

Example:Buyingacar
Buythebest
Car

Goal

GeneralCriteria
Secondary
Criteria

Alternatives

Handling

BrakingDist

TurningRadius

FordTaurus

Economy
PurchaseCost

Lexus

MaintCost

Power
GasMileage

Time060

Saab9000

Decision and Risk Analysis

AHPProcedureJudgmentsand
Comparisons
NumericalRepresentation
Relationshipbetweentwoelementsthatshareacommon
parentinthehierarchy
Comparisonsask2questions:
Whichismoreimportantwithrespecttothecriterion?
Howstrongly?
Matrixshowsresultsofallsuchcomparisons
Typicallyusesa19scale
Requiresn(n1)/2judgments
Inconsistencymayarise
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Decision and Risk Analysis

19Scale

Decision and Risk Analysis

ExamplePairwiseComparisons
Considerfollowingcriteria
PurchaseCost

MaintenanceCost

GasMileage

Wanttofindweightsonthesecriteria
AHPcompareseverythingtwoatatime
(1)Compare

PurchaseCost

to

MaintenanceCost

Whichismoreimportant?
Saypurchasecost
Byhowmuch?Saymoderately

3
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Decision and Risk Analysis

ExamplePairwiseComparisons
(2)Compare

PurchaseCost

to

GasMileage

Whichismoreimportant?
Saypurchasecost
Byhowmuch?Saymoreimportant
(3)Compare

MaintenanceCost

to

GasMileage

Whichismoreimportant?
Saymaintenancecost
Byhowmuch?Saymoreimportant

3
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Decision and Risk Analysis

ExamplePairwiseComparisons
Thissetofcomparisonsgivesthefollowingmatrix:
P

1/3

1/5

1/3

RatingsmeanthatPis3timesmoreimportantthanM
andPis5timesmoreimportantthanG
Whatswrongwiththismatrix?
Theratingsareinconsistent!
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Decision and Risk Analysis

Consistency

Ratingsshouldbeconsistentintwoways:
(1)Ratingsshouldbetransitive
Thatmeansthat
IfAisbetterthanB
andBisbetterthanC
thenAmustbebetterthanC
(2)Ratingsshouldbenumericallyconsistent
Incarexamplewemade1morecomparisonthan
weneeded
WeknowthatP=3MandP=5G
3M=5G
M=(5/3)G
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Decision and Risk Analysis

ConsistencyAndWeights
Soconsistentmatrixforthecarexamplewouldlooklike:
P
M
G
Notethatmatrix
P

1/3

5/3

1/5

3/5

hasRank=1
Thatmeansthat
allrowsaremultiples
ofeachother

Weightsareeasytocomputeforthismatrix
Usefactthatrowsaremultiplesofeachother
Computeweightsbynormalizinganycolumn
Weget

wP

15
23

0.65, wM

5
23

0.22, wG

3
23

0.13
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Decision and Risk Analysis

WeightsforInconsistentMatrices

Moredifficultnomultiplesofrows
Mustusesomeaveragingtechnique
Method1Eigenvalue/EigenvectorMethod
Eigenvaluesareimportanttoolsinseveralmath,science
andengineeringapplications
Changingcoordinatesystems
Solvingdifferentialequations
Statisticalapplications
Definedasfollows:forsquarematrixAandvectorx,
EigenvalueofAwhenAx=x,xnonzero
xisthentheeigenvectorassociatedwith
Computebysolvingthecharacteristicequation:
det(IA)=|IA|=0
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Decision and Risk Analysis

WeightsforInconsistentMatrices
Properties:
ThenumberofnonzeroEigenvaluesforamatrixis equalto
itsrank(aconsistentmatrixhasrank1)
ThesumoftheEigenvaluesequalsthesumofthe
diagonalelementsofthematrix(all1sfor
consistentmatrix)
Therefore:Annxnconsistentmatrixhasone

Eigenvaluewithvaluen
Knowingthiswillprovideabasisofdetermining
consistency
Inconsistentmatricestypicallyhavemorethan1eigenvalue
Wewillusethelargest,,forthecomputation
max
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Decision and Risk Analysis

WeightsforInconsistentMatrices

ComputetheEigenvaluesfortheinconsistentmatrix
P
M
G
P

1/3

1/5

1/3

=A

w=vectorofweights
Mustsolve:Aw=wbysolvingdet(IA)=0
Weget:
max =3.039
findtheEigenvectorfor3.039andnormalize

wP 0.64, wM 0.26, wG 0.10

Differentthanbefore!

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Decision and Risk Analysis

MeasuringConsistency
Recallthatforconsistent3x3comparisonmatrix,=3
Comparewithfrominconsistentmatrix
max
Useteststatistic:

n
max
C.I.
ConsistencyIndex
n 1

FromCarExample:
C.I.=(3.0393)/(31)=0.0195
AnothermeasurecomparesC.I.withrandomlygenerated
ones
C.R.=C.I./R.I.whereR.I.istherandomindex
n 1
2
3
4
5
6
7
8
R.I. 0
0.52.891.111.251.351.4

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Decision and Risk Analysis

MeasuringConsistency
ForCarExample:
C.I.=0.0195
n=3
R.I.=0.52(fromtable)
So,C.R.=C.I./R.I.=0.0195/0.52=0.037
RuleofThumb:C.R.0.1indicatessufficient
consistency
Caremustbetakeninanalyzingconsistency
Showdecisionmakertheweightsandaskforfeedback
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Decision and Risk Analysis

WeightsforInconsistentMatrices
(continued)

Method2:GeometricMean
Definitionofthegeometricmean:

Givenvaluesx1, x2, L , xn
n
xg n xi geometricmean
i1

Procedure:
(1)Normalizeeachcolumn
(2)Computegeometricmeanofeachrow
Limitation:lacksmeasureofconsistency
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Decision and Risk Analysis

WeightsforInconsistentMatrices
(continued)

Carexamplewithgeometricmeans
P

1/3

1/5

1/3

3
1

Normalized

1/3

.65

.69

.56

.22

.23

.13

.08

.33
.11

wp =[(.65)(.69)(.56)]
1/3
wM =[(.22)(.23)(.33)]

=0.63

1/3

=0.05

wG

=[(.13)(.08)(.11)]

=0.26

0.67
Normalized

0.28
0.05
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