Decisions – Criteria for selection

This entry is part 5 of 6 in the series Monte Carlo Simulation

The risk is best expressed by using a graph illustrating the probability curve. The slope tells us about the uncertainty involved, the steeper the curve the less uncertainty involved.

Having alternatives a study of the probability curve will ease the decision process. Since we can calculate the probability curve for any relevant item or metric like NOPLAT, EBIT, profit etc. a comparison between the alternatives makes the priority process more objective. Any board member or decisions maker can by the look at the probability curve understand the risk involved.

The argumentation is also logical and follows the principle that it can be audited and tested. The discussion can rather debate the premises and their defined uncertainties since they give the consequences.

Ordinary budgets not taken uncertainty into account is based on a deterministic and unrealistic assumtion and tells nothing about the uncertainty and risk involved.

Series Navigation<< Risk – Exposure to Gain and LossThe advantages of simulation modelling >>
Print Friendly, PDF & Email


About the Author

S@R develops models for support of decision making under uncertainty. Taking advantage of recognized financial and economic theory, we customize simulation models to fit specific industries, situations and needs.

Post a Reply