The Challenge

This entry is part 2 of 6 in the series Monte Carlo Simulation


Whenever you take a decision where you can loose or gain something, value is at risk. Most decision makers want a situation where they maximize the value, and if everything goes wrong have a minimum of regret.

Intuition based decisions are the most common type of decisions we make in our daily life, what we seem to forget is that the intuition is the sum of all our experiences gained through years of hard work and often at a high cost. So what seemed to be an easy decision might be the result of years of gathered information. The decision maker has in fact very little uncertainty since the information is known.

When the decision involves other people that need to be convinced and the complexity is vast and the potential loss is bigger than the individual can bear other methods than intuition is required. This was the situation for the team in The Manhattan project building the first atomic bomb. They needed to know and they did not have the experience to know and there was no place to gather information.

They had to take decisions with a great deal of uncertainty. In order to understand the risk involved in every single decision and the total risk, they needed a method to calculate the risk. Most decisions related to investments and business development does not face this huge challenge similar to The Manhattan project but the same method can be used.

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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.

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