defining cross-asset decision making
TRANSCRIPT
Defining Cross-Asset Decision Making
A Transportation Asset Management Expert Task Group
Cross-Asset Decision Making • Frequently discussed,
seldom defined • Terms frequently used
include: – Cross-asset trade-offs – Cross-asset allocations – Cross-asset optimization
Definitions Spark Understanding • ETG believes
definitions promote understanding
• To advance we must define
Cross-Asset Tradeoffs • Cross-asset tradeoff is a decision-making
process by which resources from one asset class are transferred to another to maximize perceived utility.
Evaluating Investments, Conditions
• Perceived utility: We are not in this definition inferring a rigorous analysis of mathematically based utility functions. Rather, we are speaking of decisions that are more informal in which agency officials perceive that one need is greater than another and transfer resources from one project or program to another
Tracking Trend Lines/Making Trade-offs
Cross-Asset Allocation • Cross-asset allocation is a decision-making
process by which resources to multiple programs or asset classes are distributed based on the simultaneous quantified prioritization of utility.
• It includes analyzing multiple programs’ benefits, not just one’s versus another’s
Three Types Described • Benefit/cost analysis • Multi-criteria decision analysis • Risk/reward-based
Benefit/Cost • Best understood process • However, difficult to apply programmatically
because: – Hard to quantify dissimilar programs’ benefits – Costs hard to measure at planning stage, when
programming tradeoffs are made – Relies on broad assumptions – Hard to quantify intangible benefits, such as livability
Multi-Criteria Decision Analysis
• Assigns values to dissimilar attributes • Uses total values to prioritize options • Values equate to ‘utility’
Risk/Reward Based • Common in Wall Street but not in public sector • Factors risk or variability into calculation of benefits • Values a potential benefit by its certainty, or
uncertainty • Uncertainty or variability equates to risk
Expected Value Explained • Risk-based
investment decisions rely on ‘expected value’
• It’s a risk-adjusted number
• Potential return X risk
Expected Value Potential return $100 Probability of return 50% Expected Value = Return X Risk = $50
Alt. A Lowest Risk, Reward
Alt. B Moderate Risk, Reward
Alt. C High Risk, Reward
Alt D. Higher Risk, Reward
Alt. E Highest Risk, Reward Efficiency Frontier
Risk
Ret
urn
Risk/Reward Efficiency Frontier
Sparking Research and Application • Risk-reward allocation decisions are uncommon • ETG hopes these example spark:
– Research – Pilot efforts – Greater understanding of risk
Cross-Asset Optimization • Cross-asset optimization is the use of
recursive mathematical computations to determine the maximum utility for a given set of investments constrained by defined performance parameters.
Example of Potential Complexity Program Increases
% Range
District Investment Scenarios 1 2 3 4 5 6 7 8
Safety 1-20 Pavement 1-10
Bridge 1-5 Signs 1-8
Signals 1-10 Roadside 1-20
Data 1-5 IT 1-8
New Staff 1-10 Equipment 1-15
Summary • Documenting tradeoffs is important • Transparency builds credibility and demonstrates
priorities • Trade-offs and optimization provide intriguing
possibilities for transportation agencies
Summary • Understanding begins with defining • ETG hopes to start a dialogue • Wants to spark wider understanding, application,
development of trade-off and optimization options • Urge researchers to explore potential • Ask agencies to try simplified tools and share their
experiences
Request • Provide your comments about these definitions
– Are they useful? – Accurate? – Understandable?
• Send us examples of your experiences with trade-offs and optimization
• TAM portal comments at [email protected] • We can post in portal, share with others • Help us refine, mature this promising field