Tang, C M and Leung, A Y T (2005) An impartial decision model for financial risk and decision analysis in construction projects. In: Khosrowshahi, F (ed.) Proceedings of 21st Annual ARCOM Conference, 7-9 September 2005, London, UK.
Abstract
In financial decision-making processes, especially in the construction industry, tangible and intangible criteria always co-exist and their weights have significant impact on the final decision outcome. Human cognitive thinking cannot be easily modelled and quantified by rational rules in conventional multi-criterion decision aid (MCDA) methods while uncertainties such as bias of decision-maker who either under or over estimates a criterion should be quantified as it contributes heavily in weight evaluation. Entropy has been useful in quantifying uncertainty in decision-making. This paper illustrates an Impartial Decision Model (IDM) that is entropy-based in three dimensional vectors to the solution of multi-criterion financial decision analysis in construction. A two-dimension plane is formulated as the inclusion of four principal vectors which are the relative weights between sub-criteria (activities); the relative weights between alternatives (projects); the relative weights between criteria (financial risks); and the weights of criteria for each sub-criterion arising on each alternative. Risk adjusted discount rate (RADR) of each vector is incorporated with the weights derived by the two-dimension plane to obtain final decision weights. The financial risks of multi-projects being undertaken by a medium-size construction firm in Hong Kong were assessed to evaluate the model. The results indicated that uncertainties in each vector have been quantified to provide an upper, mean and lower bound financial risks on projects with inconsistencies or total uncertainty level 0.009, 0.032 and 0.036 on all sub-criteria in one alternative respectively. The risk adjusted discount overall cash flow was 0.97 millions more than the original forecasted (20.84 millions). An accurate, objective and realistic decision on financial risk analysis can be provided to the decision-maker to evaluate, select and control the projects by rating impartially and discounting the cash flow in terms of risk rate.
| Item Type: | Conference Paper (Paper) |
|---|---|
| Uncontrolled Keywords: | construction; decision-making; entropy; multi-criteria analysis; weighting |
| Index terms: | construction project, decision-making, bias, risk analysis, dimension, construction industry, estimate, cash flow, Hong Kong, entropy, construction firm, decision-making process, decision analysis |
| Subjects: | probability and distributions, Geography, production management, financial management, thermal systems, environmental hazards, industry analysis, decision analysis, organization, health monitoring assessment and metrics, financial and cost management |
| Topics: | Risk Management, Sustainability, Health and Safety, Cost Management, Business Strategy, Project Management, Geographical Context, Research Practice |
| Descriptive scope: | 4 PCTA |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here