Finding Candidate Options for Investment: From Building Blocks to Composite Options and Preliminary Screening by Paul K. Davis

Finding Candidate Options for Investment: From Building Blocks to Composite Options and Preliminary Screening by Paul K. Davis

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CHAPTER ONE 
INTRODUCTION
The Department of Defense has considerable interest in examining investment programs 
by capability area. A common problem in doing so for a given capability area is that many of 
the options that arise for consideration come from different people and organizations and were 
developed based on the organizations’ past efforts, knowledge, and interests. The possible 
options thus reflect diverse assumptions about what capabilities are needed. Only sometimes 
have the individuals involved thought much about opportunities for synergy, either across 
Services or across capability areas, except where doing so is natural for their particular interests 
(e.g., an airplane builder seeing multiple missions). Further, only sometimes do those individuals 
offer up variants that cost and deliver more or less than what they recommend. As a result, 
decisionmakers who must allocate limited resources often lack information they need for 
performing tradeoff analyses, devising combined strategies that exploit synergies and hedge 
against risks, and making program adjustments wisely (e.g., increasing or decreasing allotments 
to various programs, relative to what is requested). Thus, there is need for a more comprehensive 
and systematic approach to option-generation, not merely the evaluation of options being 
proposed in the usual manner. 
This report describes a methodology and a related tool, the Building Blocks to Composite 
Options Tool (BCOT), for developing candidate options to be given serious consideration. It 
bears on how to conceive and construct options that might not otherwise be considered and on 
how to screen huge numbers of possible options so as to narrow down the set of candidates. The 
report draws on some classic methods of portfolio economics and operations research but extends 
them significantly with original work and application to defense planning. It illustrates the 
method with a notional application. 
Shaver drew on classic methods to develop a first version of the methodology using 
Microsoft Excel.® Excel has many virtues, including its ubiquity and versatility, built-in graphics 
capability, and menu-driven operations, such as sorting. It allows arrays to be manipulated easily 
and sophisticated charts to be constructed readily. Throughout most of our effort, we relied 

primarily upon the Excel version. It is the instrument of choice for some of our work. Most of 
the development of BCOT was accomplished in 2006. 
Davis generalized the theory and, recognizing some limitations of the Excel version, 
designed and built a version of BCOT in the Analytica® modeling system, which has advantages 
for some aspects of clarity, extensibility, collaboration, and exploratory analysis. Gvineria then 
improved and extended the Analytica model substantially, implementing important but difficult-

to-achieve capabilities that greatly extended the capacity for multiparameter exploratory analysis. 
A review of the methodology by Beck identified a number of residual problems, including 
fundamental difficulties. Subsequently, as the result of a concrete illustrative application (to the 
Global Strike problem) and many collaborative sessions, we improved the methodology and both 
the Excel and Analytica tools considerably. The result that we describe here is the Analytica-

based version of BCOT, but we continue to use both versions, referring to BCOT and BCOT-

Excel to distinguish between them. 
Chapter Two describes BCOT’s higher-level structure and flow, primarily with visual 
representations. Chapter Three describes BCOT’s graphical user interface—i.e., the centralized 
access point for inputs and outputs. Chapter Four illustrates cryptically a highly simplified 
application to the Global Strike capability area. Chapter Five summarizes conclusions and 
identifies possible next steps for development of both the methodology and BCOT. Appendices 
A through H provide more detail on mathematical issues, including our use of Analytica’s 
powerful array-based methods to enable exploratory analysis, and also various programming 
subtleties and practical issues for users. 
Appendices A and B discuss subtleties of BCOT’s mathematics. Appendix C describes a 
genetic-algorithm alternative to BCOT which our colleague Paul Dreyer developed in parallel to 
enable us to deal with cases in which huge numbers of BCOT composite options might 
overwhelm a personal computer. This method was implemented in Visual Basic. Appendices D, 
E, and F provide users with some guidance about how to make common changes in BCOT for 
particular applications. Appendix G discusses BCOT’s array mathematics and its 
implementation, using built-in and customized Analytica operators. Appendix H advises users on 
how to produce graphics by using Excel in combination with Analytica. 
BCOT is not only a prototype, it is also a living tool that will be adapted with each 
application. With this continuing evolution in mind, we have sought to make BCOT self-

documenting, since built-in documentation can be kept current. This report provides an 
overview, which should remain valid, and a discussion of various technical issues that will 
probably remain relevant even though details of BCOT itself evolve. The user should begin by

Finding Candidate Options for Investment: From Building Blocks to Composite Options and Preliminary Screening by Paul K. Davis