Based on the results of its inspection items, the failure diagnosis system identifies the cause of system failure. The role of failure diagnosis is to identify the system state currectly. However, diagnosis errors may be caused by sensor failure or operator errors, which lead to serious damage or unnecessary protective actions. The effect of an error depends on the system condition. In the design of failure diagnosis procedure, not only diagnosis error probability, but also its effect on the system must be considered.This paper proposes the optimization of failure diagnosis procedures based on diagnosis error loss. The optimal procedure that minimizes the expected loss caused by inspection errors is developed for two cases: one where all results of inspection items are given simultaneously and one where an inspection item is examinied sequentially. In the former case the optimal failure diagnosis logic is obtained, while in the latter case the optimal test sequence is obtained. Illustrative examples show the merits and details of the proposed method.
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