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:

Objectives?

Purchasing the airplane

Renting the airplane
Investing in a bank

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
calculations

Consequence node

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
40%

60%
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

constants

Chance Nodes

Dependancy

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