An invitation to Portfolio Decision Analysis

Source: Salo, A, Keisler, J and Morton, A – An invitation to Portfolio Decision Analysis – Ch 1 in Portfolio Decision Analysis: Improved methods for resource allocation (2011).

Organizations and individuals have goals that they seek to attain by allocating resources to actions that consume resources. These scenarios involve one or several decision makers who are faced with alternative courses of action which, if implemented, consume resources and enable consequences.The availability of resources is typically limited by constraints while the desirability of consequences depends on preferences concerning the attainment of multiple objectives. Furthermore, the decision may affect several stakeholders who are impacted by the decision even if they are not responsible for it. There can be uncertainties as well, for instance, at the time of decision making, it may be impossible to determine what consequences the actions will lead to or how much resources they will consume.

These, in short, are the key concepts that characterize decision contexts where the aim is to select a subset consisting of several actions with the aim of contributing to the realization of consequences that are aligned with the decision maker’s preferences.

Portfolio Decision Analysis (PDA)
A body of theory, methods, and practice which seeks to help decision makers make informed multiple selections from a discrete set of alternatives through mathematical modeling that accounts for relevant constraints, preferences, and uncertainties.

PDA differs from the standard decision analysis paradigm in its focus on portfolio choice as opposed to the choice of a single alternative from a set. There are analytical arguments as to why the pooling of several single choice problems into a more encompassing portfolio choice problem can be beneficial.

  1. The solution to the portfolio problem will be at least as good, because the combination of single choice problems, when considered together, constitutes a portfolio problem where there is a constraint to choose one alternative from each single choice problem. Thus, when considering these single choice problems together, the removal of these (possibly redundant) single choice constraints may lead to a better solution.
  2. If the single choice problems are interconnected – for instance, due to the consumption of shared resources or interactions among alternatives in different subsets – the portfolio frame may provide a more realistic problem representation and consequently better decision recommendations.

A key question in PDA is therefore what alternatives can be meaningfully analyzed as belonging to the “same” portfolio. While PDA methods do not impose inherent constraints on what alternatives can be analyzed together, there are nevertheless considerations which suggest that some alternatives can be more meaningfully treated as a portfolio:

  • when the alternatives consume resources from the same shared pool
  • when the alternatives are of the same “size” (measured, e.g. in terms of cost, or the characteristics of anticipated consequences)
  • when the future performance of alternatives is contingent on decisions about what other alternatives are selected, or
  • when the considerationof alternatives together as part of the same portfolioseems justified by shared responsibilities in organizational decision making.

The fact that there are more alternatives in portfolio choice suggests also that stakes may be higher than in single choice problems. Thus, the adoption of a systematic PDA approach may lead to particularly substantial improvements in the attainment of desired consequences.

But apart from the actual decision recommendations, there are even other rationales that can be put forth in favor of PDA-assisted decision processes. For example, PDA enhances the transparency of decision making, because the structure of the decision process can be communicated to stakeholders and the process leaves an auditable trail of the evaluation of alternatives with regard to the relevant criteria. This, in turn, is likely to enhance the efficiency of later implementation phases and the accountability of decision makers.

Evolution of Portfolio Decision Analysis (FYI)

  • financial portfolio optimization
  • capital budgeting models
  • quantitative models for project selection
  • decision analysis
  • from decision analysis to portfolio decision analysis

Embedding PDA in organizational decision making (FYI)

  • embedding PDA in organizational decision making
  • extending PDA theory, methods and tools
  • expanding the PDA knowledge base