Decision and Risk Analysis

Analytical Hierarchy Process (AHP)

- by Saaty
• Another way to structure decision problem
• Used to prioritize alternatives
• Used to build an additive value function
• Attempts to mirror human decision process
• Easy to use
• Well accepted by decision makers
– Used often - familiarity
– Intuitive
• Can be used for multiple decision makers
• Very controversial!
 Decision and Risk Analysis

What do we want to accomplish?

• Learn how to conduct an AHP analysis
• Understand the how it works
• Deal with controversy
– Rank reversal
– Arbitrary ratings
• Show what can be done to make it useable

Bottom Line: AHP can be a useful tool. . . but it can’t be

used indiscriminately!
 Decision and Risk Analysis

AHP Procedure – Build the Hierarchy

• Very similar to hierarchical value structure
– Goal on top (Fundamental Objective)
– Decompose into sub-goals (Means objectives)
– Further decomposition as necessary
– Identify criteria (attributes) to measure achievement of
goals (attributes and objectives)
• Alternatives added to bottom
– Different from decision tree
– Alternatives show up in decision nodes
– Alternatives affected by uncertain events
– Alternatives connected to all criteria
 Decision and Risk Analysis

Building the Hierarchy

• Note: Hierarchy corresponds to decision maker values
– No right answer
– Must be negotiated for group decisions
Affinity
• Example: Buying a car Diagram
Goal Buy the best
Car

General Criteria Handling Economy Power

Secondary Braking Dist Turning Radius Purchase Cost Maint Cost Gas Mileage Time 0-60
Criteria

Alternatives Ford Taurus Lexus Saab 9000

 Decision and Risk Analysis
AHP Procedure – Judgments and
Comparisons
• Numerical Representation
• Relationship between two elements that share a common
parent in the hierarchy
• Comparisons ask 2 questions:
– Which is more important with respect to the criterion?
– How strongly?
• Matrix shows results of all such comparisons
• Typically uses a 1-9 scale
• Requires n(n-1)/2 judgments
• Inconsistency may arise
 Decision and Risk Analysis
1 -9 Scale
Intensity of Importance Definition
1 Equal Importance
3 Moderate Importance
5 Strong Importance
7 Very Strong Importance
9 Extreme Importance
2, 4, 6, 8 For compromises between the above

Reciprocals of above In comparing elements i and j

- if i is 3 compared to j
- then j is 1/3 compared to i
Rationals Force consistency
Measured values available
 Decision and Risk Analysis

Example - Pairwise Comparisons

• Consider following criteria
Purchase Cost Maintenance Cost Gas Mileage

• Want to find weights on these criteria

• AHP compares everything two at a time

(1) Compare Purchase Cost to Maintenance Cost

– Which is more important?

Say purchase cost
– By how much? Say moderately 3
 Decision and Risk Analysis

Example - Pairwise Comparisons

(2) Compare Purchase Cost to Gas Mileage

– Which is more important?

Say purchase cost
– By how much? Say more important 5

(3) Compare Maintenance Cost to Gas Mileage

– Which is more important?

Say maintenance cost
– By how much? Say more important 3
 Decision and Risk Analysis

Example - Pairwise Comparisons

• This set of comparisons gives the following matrix:
P M G
P 1 3 5
M 1/3 1 3
G 1/5 1/3 1

• Ratings mean that P is 3 times more important than M

and P is 5 times more important than G
• What’s wrong with this matrix?
The ratings are inconsistent!
 Decision and Risk Analysis

Consistency
• Ratings should be consistent in two ways:
(1) Ratings should be transitive
– That means that
If A is better than B
and B is better than C
then A must be better than C
(2) Ratings should be numerically consistent
– In car example we made 1 more comparison than
we needed
We know that P = 3M and P = 5G
3M = 5G M = (5/3)G

1
 Decision and Risk Analysis

Consistency And Weights

• So consistent matrix for the car example would look like:
P M G – Note that matrix
P 1 3 5 has Rank = 1
– That means that
M 1/3 1 5/3 all rows are multiples
of each other
G 1/5 3/5 1

• Weights are easy to compute for this matrix

– Use fact that rows are multiples of each other
– Compute weights by normalizing any column
• We get
wP  15
23  0.65, wM  5
23  0.22, wG  3
23  0.13
1
 Decision and Risk Analysis

Weights for Inconsistent Matrices

• More difficult - no multiples of rows
• Must use some averaging technique
• Method 1 - Eigenvalue/Eigenvector Method
– Eigenvalues are important tools in several math, science
and engineering applications
- Changing coordinate systems
- Solving differential equations
- Statistical applications
– Defined as follows: for square matrix A and vector x,
Eigenvalue of A when Ax = x, x nonzero
x is then the eigenvector associated with 
– Compute by solving the characteristic equation:
det(I – A) = | I – A | = 0
1
 Decision and Risk Analysis

Weights for Inconsistent Matrices

– Properties:
- The number of nonzero Eigenvalues for a matrix is equal to
its rank (a consistent matrix has rank 1)
- The sum of the Eigenvalues equals the sum of the
diagonal elements of the matrix (all 1’s for
consistent matrix)
– Therefore: An nx n consistent matrix has one
Eigenvalue with value n
– Knowing this will provide a basis of determining
consistency
– Inconsistent matrices typically have more than 1 eigen value
- We will use the largest,  , for the computation

max
1
 Decision and Risk Analysis

Weights for Inconsistent Matrices

• Compute the Eigenvalues for the inconsistent matrix
P M G
P 1 3 5
M =A
1/3 1 3
G 1/5 1/3 1

w = vector of weights
– Must solve: Aw = w by solving det(I – A) = 0
– We get:  max = 3.039
find the Eigen vector for 3.039 and normalize
wP  0.64, wM  0.26, wG  0.10
Different than before!
1
 Decision and Risk Analysis

Measuring Consistency
• Recall that for consistent 3x3 comparison matrix,  = 3
• Compare with max from inconsistent matrix
• Use test statistic:
 max n
C.I.   Consistency Index
n 1
• From Car Example:
C.I. = (3.039–3)/(3-1) = 0.0195
• Another measure compares C.I. with randomly generated
ones
C.R. = C.I./R.I. where R.I. is the random index
n 1 2 3 4 5 6 7 8
R.I. 0 0 .52 .89 1.11 1.25 1.35 1.4
1
 Decision and Risk Analysis

Measuring Consistency
• For Car Example:
C.I. = 0.0195
n=3
R.I. = 0.52 (from table)
So, C.R. = C.I./R.I. = 0.0195/0.52 = 0.037

• Rule of Thumb: C.R. ≤ 0.1 indicates sufficient

consistency
– Care must be taken in analyzing consistency
– Show decision maker the weights and ask for feedback

1
 Decision and Risk Analysis

Weights for Inconsistent Matrices

(continued)

• Method 2: Geometric Mean

– Definition of the geometric mean:

Given values x1, x2,  , xn

 n 
xg  n  xi   geometric mean
 i1 
– Procedure:
(1) Normalize each column
(2) Compute geometric mean of each row
– Limitation: lacks measure of consistency

1
 Decision and Risk Analysis

Weights for Inconsistent Matrices

(continued)

• Car example with geometric means

P M G P M G
P 1 3 5 Normalized P .65 .69 .56
M 1/3 1 3 M .22 .23 .33
G 1/5 1/3 1 G .13 .08 .11
1/3
wp = [(.65)(.69)(.56)] = 0.63 0.67
1/3
wM = [(.22)(.23)(.33)] = 0.26 Normalized 0.28
1/3
wG = [(.13)(.08)(.11)] = 0.05 0.05