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Class Connection: Value focused thinking, Optimization

Ok. See the chart in the figure alongside. At one glance can you tell what is it the chart of. If you have read the title of the blog, you know – its the stimulus package and how the money will be distributed among the several ‘reform’ projects.

Now, study the chart for a few moments and then start thinking about all the concepts taught in class recently. Want to learn how to make this chart?

Start with structuring your values as if you were the President of the United States. What matters to you? Is it functioning, well-oiled economy, employed and healthy citizens, etc. etc. Once you have defined those, lets move on to objectives – what do you want to achieve? Make sure you come up with a comprehensive list of alternatives on how things can be achieved. You will come up with your objectives related to the matters that you really value. Say, for citizens you may want to improve healthcare systems, create more jobs, and provide good education. Similarly, for the economy to come back on track you may want to stop banks from failing, prevent large companies to file for bankruptcy, improve trade relations, and others. Once you have gone so far try to separate the fundamental objectives from the mean objectives. Fundamental – Save banks, Means – Buy back toxic securities, reform accounting systems, pour money into the system. Fundamental – Healthy citizens. Means – Provide tax breaks, ease access to healthcare systems, save jobs. Remember, it is an iterative process. You may have to go back and forth a few times. But never mind, the exercise is worth it. Once you have the complete list down, you will have a clear objective hierarchy and it will start to look very close to the figure.

Next step – You need to think of few important concepts – resources/constraints, (un)certainties, possible outcomes, and consequences. You may want to brush up some skills in defining the metrics for the consequences so that you are comparing apples to apples and not not apples to cucumber where deciding what path to take. Some examples to lead the exercise – Resources/Constraints – $100 billion dollars, 2 years, and 5000 people. Outcomes – banks recover, companies don’t file for bankruptcies. Consequences – Stock market index grow by XX, GDP growth by Y%, Employment rate decrease by Z%. You will need to allocate the resources in proper amounts to each alternative and measure the consequences. The resources will need to be optimally assigned so to achieve the maximum result for each objective. You may want to try out some decision modeling techniques such as utilities, risk profiles, dominance, even monte carlo simulation to help bring metrics to a level field and also to make informed decisions. This may be time consuming so that best way to narrow the problem down as much as possible before starting the modeling process.

And then you should have all the information you need to draw the figure above.