Sensitivity Analysis

Dr. Saeed Shiry

Amirkabir University of Technology

Computer Engineering & Information Technology Department
Sensitivity analysis
 Sensitivity analysis means varying the inputs to
a model to see how the results change
 Sensitivity analysis is a very important
component of exploratory use of models
 model is not regarded as “correct”
 sensitivity analysis helps user explore implications of
alternate assumptions
 human computer interface for sensitivity analysis is
difficult to design well
 In many models we need to make assumptions
we cannot test
 Sensitivity analysis examines dependence of
results on these assumptions
Sensitivity Analysis
 Sensitivity Analysis Answers the question:
 What does make a difference in the decision?
 Determining what does matters and what
does not requires incorporating sensitivity
analysis throughout the modeling process.
 No optimal sensitivity analysis procedure
exist for decision analysis: Model building is
an Art!
Sensitivity Analysis
 The question that we ask performing SA is:
Are we solving the right problem?
 Type III Error: implies that the wrong question
was asked or inappropriate decision context
was used.
Example: Air Line Company
 Eagle Airlines has expansion plan. Currently 50% of flights are
scheduled and 50% are chartered.
 A new seneca airplane costs 85000-90000USD.
 It has seats for 5 passenger. Operating cot is 245 per hour.
Annual fixed cost is 20000 including insurances and finance
charges.
 The company needs to borrow 40% of the money with 9.5%
interest rate.
 The company may be able to charge 300-350$ per hour for
charter or 100$ per person for scheduled flights. Scheduled
flights on average is half full. Company hops that the airplane fly
1000 hour per year but 800 is more realistic.
 Other options:
 Invest in Bank with 8%
 Rent airplane with 2500-4000$
Modeling the problem
 Alternatives:
 Purchasing the airplane
 Renting the airplane
 Investing in a bank
 Objectives?
 Company Growth, Greater influence in the community,
Maximizing Profit
 If the probability of various unknown such as
operating cost, amount of business ,etc is known
then an decision tree or influence diagram can be
used to structure the problem.
 Initial influence diagram
Inputs

Inputs
Inputs

Intermediate Consequence node

calculations
Variables

The base Value: Initial Guess regarding the variables

Lower and Upper Bound: Absolute extremes ( variables can not fall beyond)
 Annual Profit
 We can use input variables to calculate estimate of
annual profit: 23000-220025= 9975$
 This shows 19% on the investment (60% of plane)
One Way Sensitivity Analysis
 What variables really make a difference in
terms of the decision in hand?
 Do different interest rates really matter?
 Does it matter that company can set the ticket
price?
 Hours Flown how much impacts on the profit?
 For example in the case of Hours Flown
company is quite unsure by setting bands
between 500 and 1000. To show the effect of
this variable we use a graph.
One way Sensitivity graph for
hours flown

The fact that the company believes that the hours flown could be above or
below 664 suggests that this is a crucial variable.
Tornado Diagrams
 A Tornado Diagram allows us to compare one way
SA for many variables at once.
 Tornado Diagram tells us which variables we need
to consider more closely and which ones we can
leave at their base value.
 We take input variables and wiggle them between
high and low values to determine how much change
is induced in profit.
 Every thing is held at its base value except the
variable under study.
Tornado Diagrams
Setting Capacity of scheduled flights at 40%
instead of 50% implies a loss of 10025
60%
40% leads to
profit
Tornado Diagrams
 The most sensitive variable ( one with the longest
bar ) is set at top and the least sensitive at the
bottom.
 The vertical line at 4200 represents what could be
earned by investment in Bank.
 Interesting points:
 Annual profit is insensitive to aircraft price, Interest rate,
and proportion financed.
 Tornado Diagram tells us which variables we need
to consider more closely and which ones we can
leave at their base values.
Two way sensitivity Analysis
 Suppose we wanted to explore the impact of
several variables at one time.
 A graphical technique is available for studying
the interaction of two variables.
 For example suppose we want to consider
the joint impact of changes in the 2 mot
crucial variables( Operating cost and
Capacity of scheduled flights)
Two way sensitivity Analysis
 Imagine a rectangular space taht represents all of
the possible values that these two variables could
take.
 We have to find those values of 2 variables for
which the annual profit would be less than 4200$.
Two way sensitivity Analysis
Two way sensitivity Analysis
 The point labeled base value shows that
when we plug in the base values for the
capacity and operating cost, we get an
estimated profit that is grater than 4200$ so
the project looks promising.
 However if we consider point C where
operating cost is slightly more than base
(248) and capacity is slightly less than base
(48%) they lead to a situation which suggest
not to buy the plane!
Sensitivity to probability
 The next step is to model the uncertainty
surrounding the critical variables.
 There are 4 critical variables in this example:
Capacity of scheduled flights, Operating cost,
Hours flown and Charter price, which we only
need to think about 3 because charter price is
decided by company.
 Changed Influence diagram
Chance Nodes

Dependancy

constants
 Decision tree
 This decision tree shows the pessimistic and optimistic values for
the three uncertain variables.
Uncertainties
 Now that the problem is simplified, we can
include consideration about
interdependencies of the chance variables.
 For example probability distribution of Hours
flown depend on Capacity of scheduled
flights. Thus r is greater than s in Decision
tree.
 The next step is to asses values to p,q,r, and
s.
Sensitivity graph
 Now we can create a two way sensitivity
graph for q and r.
 We write the expected value of purchasing
airplane in terms of q and r. We set p=0.5
and set s=0.8r.
Sensitivity graph
Two way SA