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Subjective Probability Distribution Elicitation in Cost Risk Analysis: A Review

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Technical rept.

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A cost estimate for a project, such as the development of a new aircraft or satellite system, carries with it an inherent probability that the actual cost will exceed the estimate that changes in requirements, technology, the economic environment, and a multitude of other factors over the life of an acquisition project will change the final cost. One major approach to cost risk analysis evaluating and quantifying the uncertainty of a cost estimate has been probabilistic expressing the uncertainty in a cost estimate as a probability distribution over a range of potential costs. Cost analysts in industry and government and researchers in statistics and management have often proposed that, to get probability distributions for platforms using new and untried technologies, expert judgment should be tapped and subjective probability distributions elicited from the experts to represent cost uncertainty. Procedures for eliciting subjective probability distributions in cost risk analysis are reviewed in this technical report. This review of elicitation procedures is the product of two projects. The first was a RAND Corporation Internal Research and Development IRD project titled Risk Management and Risk Analysis for Complex Projects Developing a Research Agenda, conducted in 2001 2002. Support for RANDs continuing program of self-sponsored independent research is provided, in part, by donors and by the independent research and development provisions of RANDs contracts for the operation of its U.S. Department of Defense federally funded research and development centers. The principal investigator for this research was the present author. RAND Project AIR FORCE PAF, a division of the RAND Corporation, is the U.S. Air Forces federally funded research and development center for studies and analyses.

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  • Economics and Cost Analysis

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