Adjusting the Utility or "Value" Curve
The concept of utility is a measure of value or satisfaction. In economics, utility is a measure of the satisfaction gained from the consumption of a "package" of goods and services.In Optsee®, you define your utility curves by using "Value" charts in which "100" represents maximum satisfaction with a given outcome (Best Outcome), and "0" represents no satisfaction with a given outcome (Worst Outcome). This allows you to translate different attributes to common value measurements.
Click here view for a video explaining how this works using a simple car-purchasing example.
For example, the chart in Figure 1 illustrates Utility versus Potential Revenue. In this chart, utility goes up linearly as the projected revenues increase. A project that has potential revenues of $10 million generates no utility units and a project that has potential revenues of $50 million generates 100 utility units. Since the utility curve is a straight line, a project that has a revenue potential of $30 million (the mid-point between $10 and $50 million) generates 50 utility units. This type of neutral utility curve is described as a "50/50" curve because the relationship between the utility and the attribute is a straight line, i.e., the mid-point of the attribute is 50 utility units.
Figure 1: Straight-line Rate of Return
In reality, however, utility curves are often not straight-lines. Utility curves can curve to reflect diminishing or increasing returns. Optsee give you the ability to adjust the Utility Curve function to accurately model your decision and your utility curves with the click of a mouse. Simply place the mouse cursor on the Utility Curve chart, and hold the Ctrl key as you click (cmd-click on the Macintosh) to adjust the line to intersect at that point. The blue line will automatically move to that point.
The utility curve in the chart in Figure 2 has been adjusted to reflect an increasing rate of return of utility versus the potential revenue. In this chart, projects with $30 million in revenue potential generate 20 utility units, and the remaining 80 utility units are generated by projects with revenue projections between $30 and $50 million. Thus, this utility curve is biased towards projects that have a higher revenue potential compared to the straight-line (default) utility curve. A curve that is lower than 50 utility units at the mid-point represents an increasing return because more of the utility is gained in the second half between the worst and best outcomes. The curve below is a "20/80" curve because 20 utility units are used in the first half of the curve, and 80 units in the second half.
Figure 2: Increasing Rate of Return
The chart in Figure 3 illustrates Utility versus Unit Manufacturing Cost for a widget. The utility curve has been adjusted to reflect a diminishing rate of return of utility. In this case, the utility increases as the widget unit manufacturing cost goes down. However, 70 utility units are generated by reducing the cost from $5 to $3 per widget, whereas only 30 additional units are generated by reducing the cost from $3 to $2 per widget. This curve reflects a decision maker whose utility is largely satisfied by reducing the cost to $3 per widget, and gains marginal satisfaction from further reductions. A curve that is higher than 50 utility units at the mid-point represents a diminishing return because more of the utility is gained in the first half (between the worst and best outcomes). The curve below is a "70/30" curve because 70 utility units are used in the first half of the curve, and 30 units in the second half.
Figure 3: Diminishing Rate of Return
In Optsee®, you can use many many different value curve types as shown in Figure 4 so you can use virtually any data types. In particular, text and categorical value curves let you assign numerical value to text data such as "excellent," "good, "fair," etc. With Optsee®, you fit your model to your data, you aren't forced to fit your data to a model.
Figure 4: Multiple Value Curve Types in Optsee®
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