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VAR and Flexibility• VAR is a common financial concept• It stresses downside losses, risks• However, designers also need to look atupside potential: “Value of Gain”• Flexible design provides value by both:– Decreasing downside risk– Increasing upside potential– See next figureGarage Case, etc de Neufville, Scholtes and Wang Slide 7 of 23Sources of value for flexibilityCut downside ; Expand UpsideCumulative ProbabilityExpand upside potentialOriginaldistributionDistribution withflexibilityCut downside risksValueGarage Case, etc de Neufville, Scholtes and Wang Slide 8 of 234
Excel Analysis Sequence toillustrate value of flexibility1: Examine situation without flexibility– This is Base case design2: Introduce variability (simulation)=> a different design (in general)3: Introduce flexibility=> a even different and better design• Note: Excel simulation techniques taught in ESD.70Garage Case, etc de Neufville, Scholtes and Wang Slide 9 of 23Parking Garage Case• Garage in area where population expands• Actual demand is necessarily uncertain• Design Opportunity: Stronger structure– enables future addition of floor(s) (flexibility)– Requires extra features (bigger columns, etc)– May cost less !!! Because can build smaller• Design issue: is flexibility worthwhile?Garage Case, etc de Neufville, Scholtes and Wang Slide 10 of 235
- Page 1 and 2: Value of Flexibilityan introduction
- Page 3: CDFCumulative Probability100%80%60%
- Page 7 and 8: Step 1: Set up base caseDemand grow
- Page 9 and 10: Recognizing uncertainty =>different
- Page 11 and 12: Sources of value for flexibility:2)
Excel Analysis Sequence toillustrate value of flexibility1: Examine situation without flexibility– This is Base case design2: Introduce variability (simulation)=> a different design (in general)3: Introduce flexibility=> a even different and better design• Note: Excel simulation techniques taught in ESD.70Garage Case, etc de Neufville, Scholtes and Wang Slide 9 of 23Parking Garage Case• Garage in area where population expands• Actual demand is necessarily uncertain• Design Opportunity: Stronger structure– enables future addition of floor(s) (flexibility)– Requires extra features (bigger columns, etc)– May cost less !!! Because can build smaller• Design issue: is flexibility worthwhile?Garage Case, etc de Neufville, Scholtes and Wang Slide 10 of 235
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