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Term
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Explanation
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correlation
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A statistical relationship between two or more variables such that systematic changes in the value of one variable tend to be accompanied by systematic changes in the
other. For example, as illustrated below, the height of parents and mature children can be shown to be correlated based on plotting on a graph parent heights versus child heights. If
there was no correlation, the plot would appear as dots spread across a roughly circular shape. Instead, the plot appears as an oval shape aligned along approximately a 45 degree line
from the origin of the graph. The shape demonstrates that taller parents tend to have taller children, but the relationship is not perfect, indicating that there are other factors
involved.
A sample correlation plot (parent vs. children height)
Correlation may be quantified by calculating a coefficient of correlation—a number between -1 and 1 that indicates the strength and direction of a linear
relationship between two variables. Regression analysis is used to compute correlation coefficients.
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cost benefit analysis
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A decision making theory and collection of related analytic techniques for evaluating decisions based on comparing benefits and costs. While many decision-aiding tools
claim to do this, CBA is distinguished by its foundation in theory and by its rigorous process for computing costs and benefits. Like decision
analysis (DA), CBA is essentially a "megatool;" a coherent set of concepts and techniques that may be used to identify, estimate, and place monetary values on the impacts of
proposed actions.
A distinct characteristic of CBA, compared to many other decision aiding approaches, is that it does not quantify the costs and benefits of actions from the specific
perspective of responsible decision makers. Instead, CBA measures costs and benefits from the perspective of society at large. Thus, CBA is most applicable for government decision
making. CBA requires identifying all parties affected by a proposed action and estimating the monetary value of the effects the action would have on their welfare. The US government
began using CBA in the 1930s, and CBA continues to be the mostly widely used approach for formally evaluating and prioritizing major projects undertaken by government agencies.
With CBA, costs and benefits are measured relative to a "do-nothing," status quo option. According to CBA, an action should be considered only if its net benefit
(benefit minus cost) is greater than zero. According to CBA, all alternatives with positive net benefit should be considered, and the best alternative is the one that leads to the
greatest benefit gain (i.e., the alternative with the largest net benefit).
To determine the monetary value of the impacts of proposed projects, CBA relies on the concept of market prices. In theory, a free
market generates prices by balancing aggregate demand with aggregate supply. Each individual adjusts his or her purchases until the value of the last item purchased is just worth what
it costs. Thus, the prices that result indicate the marginal benefit realized from each individual's consumption of each good.
Following this logic, CBA attempts to use market prices to value project impacts. For example, suppose a project is proposed to clean up a hazardous waste site. CBA
might use real estate prices to estimate the value of the cleanup effort. The market values of similar properties close to and far from the waste site would be compared to determine the
value loss suffered by those living near to the site. Removing the site would, presumably, eliminate the property value differences and create this much added value for home owners.
This monetary value could be compared to the costs of the project to determine whether the project should be conducted. To value project impacts for which no market exists, CBA uses
procedures that indirectly reference market prices. For example, values for CBA are often obtained based on surveys or interviews with people to estimate their willingness to pay to
obtain or avoid the effects in question.
Although CBA is widely used and based on compelling theory for decision making, the approach is considered by many to be controversial. CBA ignores the way in which
the costs and benefits of proposed actions are distributed, a consideration that is often important to decision makers. Also, numerous applications of CBA have demonstrated that the
approach frequently concludes that the benefits of proposed government interventions do not justify the costs. This result may be due the fact that some project benefits simply cannot
be addressed through reference to prices that exist in the marketplace.
Since CBA does not normally rely on methods for assessing and incorporating expert judgments, it can fail to account for project outcomes that do not have immediate,
tangible, economic implications. Likewise, CBA may fail to address important risks in situations lacking data for quantifying uncertainties. CBA provides little opportunity for
stakeholders to contribute to the evaluation process, except perhaps, in framing the problem (e.g., identifying alternatives). On the other hand, CBA avoids the necessity of decision
makers providing subjective value judgments. It therefore appeals to some because it appears to be a more value-free guide to decision making. In truth, though, CBA embodies strong
value judgments.
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cost of capital
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The cost a company effectively pays in order to obtain cash (from debt and equity sources) to finance its operations. It is the return that is required on company
investments to compensate the investor, taking into account the risk involved. The cost of capital is generally calculated on a weighted average basis (see WACC).
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criterion
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Any quality, property, characteristic, or rule established to guide decision making. Attributes, objectives and goals can be referred to as criteria. Oftentimes, multiple criteria are relevant to making a choice, and the use of multiple criteria for
decision making is the subject of multi-criteria analysis.
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critical path
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The subset of activities within a project whose duration determines the duration of the project. If an activity along the critical path is delayed, then the project
will be delayed.
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D
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dashboard
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A user interface for a software package that, like a dashboard on an automobile, organizes and presents information in a way that is intended to be easy to read and
absorb. Most modern software tools employ user interfaces that resemble dashboards, but vendors of project portfolio management (PPM) tools often use
the term to ensure that potential customers recognize the similarity. Typically, and unlike most automobile dashboards, a PPM dashboard is interactive — if the user clicks on an
item, more detailed information is provided. However, whether or not the information displayed by a PPM dashboard is "real time," as it is with an automobile dashboard, depends on the
tool and the type of information presented.
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data mining
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The process of extracting from a (usually large) database information to assist decision making. Typically, data mining utilizes sophisticated software to identify
statistical patterns or relationships in online data (data accessible from a network) that may be commercially useful. Information obtained in this way is often used to help
organizations gain a better understanding of their customers and can be used to aid decisions regarding marketing and customer support.
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de Bono Six Hats
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A thinking tool for group and individual decision making. The method is designed to help people make better decisions by looking at the choice from different
perspectives, thereby producing a more comprehensive understanding of issues. The method is described in the book Six Thinking Hats by Dr. Edward de Bono.
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decision analysis (DA)
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A body of knowledge and related analytic techniques for making decisions based on decision theory. DA provides numerous
methods and aids for addressing essentially all the steps involved in formal decision making, including problem definition, information collection, risk assessment, the identification
and screening of alternatives, the evaluation and selection of alternatives, and the communication and implementation of decisions. DA has sometimes been described as a "megatool" for
decision making—unlike most other decision tools, DA is more like a tool box than a tool. DA is relevant to project portfolio management because
it provides a framework for analyzing project selection decisions as well as specific methods for quantifying project value and addressing project risk.
DA was initially developed in the 1960s and 1970s at Harvard, Stanford, MIT, Michigan, and other major universities. The term "decision analysis" was coined in 1964 by
Ron Howard, a professor at Stanford University. DA is generally considered a branch of the field of operations research, but also has links to management science, economics, systems
analysis and psychology. A collaborative, step-by-step process for applying DA within organizations, called the Dialogue Decision Process, was developed in the late 1970s by
not-for-profit organization SRI International and has subsequently been refined by the company Strategic Decisions Group (SDG). DA is an area of consulting specialty, and there are
journals and a professional society devoted to the field.
Dialogue Decision Process
According to DA, a good decision is one that (1) considers the full range of alternatives that are available to the decision maker, (2) accounts for what the decision
maker believes will be the consequences of choosing each alternative, and (3) is consistent with the decision-makers preferences for the various possible decision consequences. In other
words, making good decisions requires knowing what you can do, what you believe, and what you want.
DA employs various procedures and tools for understanding how the actions taken in a decision determine the consequences that may result, as well as the significance
of those consequences relative to the decision-maker's objectives. Analytic models are constructed that represent these two components (a consequence model that simulates decision
outcomes and a value model for measuring the decision-maker's preferences for those consequences). Probabilistic reasoning is used to quantify
risk and determine whether additional information should be collected before committing to a course of action. The models allow sensitivity
analysis, a process that identifies the issues that make the most difference and helps decision makers avoid "paralysis by analysis."
DA is generally focused on two types of decisions: (1) one-time decisions where alternatives must achieve multiple, competing objectives and (2) sequential decisions
where uncertainties and learning play an important role. In both cases, a major task for the decision analyst is constructing the value model that allows the overall desirability of
alternatives to be computed based on how they perform relative to a set of evaluation measures, or "attributes." Multi-attribute utility analysis (MUA)
is often used to construct the value model. To represent decision timing and uncertainty, sequential decisions are analyzed using decision
trees and influence diagrams. Decision analyses of project decisions often include calculations
of project expected net present value (ENPV) and may include valuations based on real options analysis.
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decision model
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An analytic representation (model) of a choice among possible actions or alternatives. A decision model represents the factors relevant to decision making and their
relationships.
Decision models fall into two categories: descriptive and prescriptive (a prescriptive decision model is also called a "normative" model). A
descriptive decision model describes how people typically make decisions and seeks to explain how various factors influence decision-making behavior, including why people often make
sub-optimal decisions.
In the context of project portfolio management, the term decision model usually refers to a prescriptive decision model designed to
indicate how people or organizations should choose based on principles of logic and rationality. For example, a decision model based on decision analysis seeks to identify choices that are logically consistent with the available alternatives, preferences, and beliefs of the
decision maker. Such a model would include performance measures that indicate the degree to which the possible outcomes of choosing each
alternative would achieve each decision objective, and a value model indicating the relative preference
the decision maker assigns to such performance. In addition to helping decision makers make good choices, decision models can often be "mined" to provide additional information and
insights, including sensitivities and value of information (VoI).
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decision support system (DSS)
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A computer software program and associated database intended to aid managers in making decisions. A DSS may include a decision
model, simulation programs, and algorithms. Alternatively, a DSS may merely provide information
useful for supporting decisions. The term is an old one that is not used much now, as its definition is so broad as to not be particularly useful. A project
portfolio management tool is an example of a DSS.
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decision theory
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A theory of how individuals should make decisions, related to the concept of "rationality" used in economics. Also called subjective expected utility theory, or
simply utility theory, the theory is derived from a set of easily-accepted axioms (hypotheses) defining how rational people behave. For example, one such axiom (transitivity)
states that if a person prefers outcome A to outcome B and outcome B to outcome C, that person should prefer outcome A to outcome C. Another axiom (substitution) states that if a person
is participating in a lottery where the prize is A, and if that person is completely indifferent between receiving prize A and some alternative prize C, then that person should not care
if the lottery is modified by substituting prize C for the equally desirable prize A.
Decision theory shows that if these and a few other axioms are accepted, then it can be proven that there is a mathematical function, called a utility function and denoted U, that will aggregate all of the different considerations that must be taken into account when deciding among alternatives.
Furthermore, the best alternative (the one that is most preferred) will be the one that maximizes the value of U (or, if there are uncertainties, the expected value of U).
The major focus of decision theory is estimating the function U. Multi-attribute utility analysis is a set of techniques for
estimating U for the common situation where there are multiple characteristics or "attributes" relevant to determining the desirability of alternatives.
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decision tree
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A graphic representation of a decision problem wherein the alternatives to decisions and possible outcomes to uncertainties are represented sequentially in a tree-like
diagram. A decision tree can be used as an aid for optimizing projects that require a sequence of choices using a computational approach based on dynamic programming. Decision trees are used in many project portfolio management tools as a means for addressing project risk. See the paper
chapter on methods for addressing risk for more information and an example.
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decision unit
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Also called a decision variable, a variable in a decision model representing the choice that is to be made in the
context of a decision problem. As with other decision models, the decision units for a project priority system should be defined as part of the framing process.
Decision units are important because they determine the granularity of the analysis, including spatial, temporal, and intensity assumptions. When shopping for project portfolio management tools, it is very important to understand the restrictions that are placed on the definition of decision units. For example, if you
need a tool to help you prioritize capital projects, it might be reasonable to consider one that evaluates "fund" versus "don't fund" options for each project. However, such a tool
might be useless for evaluating maintenance projects if the appropriate decision unit is the choice among alternative 5-year spending plans for programs consisting of groups of similar
assets.
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Delphi method
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A method used in groups to reduce biases in the group estimates or other group judgments. The Delphi method is typically conducted as an iterative process wherein a
facilitator repeatedly obtains judgments from each member of the group interspersed with feedback of group responses and opinions. Group members typically remain anonymous with regard
to the opinions expressed and interact through the facilitator in order to reduce biases in the estimates produced.
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