Information Entropy Method For Project Portfolio Selection

Information Entropy Method for Project Portfolio Selection
Zhaohong Wang
College of Physical Education and Sports
Beijing Normal University
Beijing, China

Yue Yu
School of Mathematical Sciences
Beijing Normal University
Beijing, China
Abstract—Project portfolio management is about making strategicchoices, resource allocation. Project portfolio management has been considered as thebridge between enterprise strategic management and project management. It focuses on project selection and chooses the right projects from the many opportunities the enterprises face.There are relative popularity of various portfolio selection methods—from financial methods to strategic approaches, bubble diagrams and scoring approaches. Popular methods are investigated and compared in this research.Although conceptually appealing and perhaps the most rigorous mathematically based portfolio models see more visibility in text books and journal articles than in corporate offices. The authors provide an information entropy method for project portfolio selection. Besides combining several important methods and criteria, information entropy weights acted as weight coefficients for evaluatingcriteria in order to avoid uncertainty and randomicity of subjective judgments. The method proposed in this paper provides a quantificational evaluation method for enterprises to select project and project portfolio.
Keywords- Project portfolio selection; Project portfolio management; Enterprise project management; Information entropy

1. INTRODUCTION
Portfolio management is the centralizedmanagement of one or more portfolios, and involves identifying, prioritizing, authorizing, managing, and controlling projects, programs, and other related work, to achieve specific strategic business objectives. Through portfolio management, organizations could ensure the efficient of their investment. Considering the limitation of the resources and capability, neither can managers choose all profitableprojects, nor do they execute all the projects at the same time. Project portfolio management (PPM) has been considered as the bridge between enterprise strategic management and project management. PPM focuses on project selection and chooses the right projects from the many opportunities the enterprises face∗.

2. LITERATURE REVIEW
The introduction or uses of a number of project portfoliomethods have been witnessed in recent years. (1) Scoring models. Here, projects are rated and scored on a variety of qualitative questions. Experts and senior managers are considered as the people who should give the scores. In some cases, the project score becomes the criterion for project prioritization (Hall and Naudia, 1990).
(2) Mathematical models. From the 1960s and 1970s, mathematicalmethods have been widely applied. Techniques such as linear, dynamic and integer programming were employed. The objective was to develop a portfolio of new and existing projects to maximize some objective function (forexample, the expected profits) subject to a set of resource constraints (Jackson, 1983).
(3) Financial models and financial indices. These range from ranking or selecting projects basedon traditional net present value (NPV), internal rate of return (IRR), and payback methods through to various financial ratios (Bard, Balachandra, and et al. 1988)
(4) Probabilistic financial models. These include Monte Carlo Simulation (for example, the add-on programs to various spreadsheets, such as At Risk and Crystal Ball); PERT/CPM analysis and decision trees method (Souder andMandakovic,1986).
(5) Options pricing theory. This newer method, adopted by Kodak and others, treats each stage of the new product project much like purchasing an option on a future investment (Faulkner, 1996). Real options method has been used in many projects with high uncertainty, such as projects in mining industry and petroleum exploitation.
(6) Strategic approaches. Here, the selection of the...