24 November 2012

Calculating Uncertainty


It took me a lot longer than I thought it would to write this paper. I wanted a gentle introduction to simulation with SIPs and it turned out that gentle is not easy. So it's 20 pages with lots of examples and charts and two Excel workbooks to go along with the text. The workbooks aren't necessary but they help.
In many ways, the essence of Probability Management is how to do probabilities by counting stuff – and having a computer do the counting. This monograph focuses on that.

Update:
Now available as a paperback and as a Kindle e-book.

Pdf format and Excel workbooks:
http://smpro.ca/sipmath

20 November 2012

Risk = PxI is wrong

You're estimating a project.

Let’s say you have a risk element and the event has a 25% chance of happening. If it does, it will add $100,000 to the cost of a particular task. You’ll resist the temptation to just add $25,000 to the task cost, because that’s not what happens in the real world. It’s one project, not a million transactions, so the average is invalid. In each possible future, it’s $100,000 or nothing.

It’s possible that downstream events would be triggered by the $100,000 while $25,000 would fly under the radar. Also, looking at the range of possible project costs, the high numbers would be $75,000 low, and the low numbers would be $25,000 high.

So don’t use Probability x Impact. Ever.

08 November 2012

The Art of the SIP

Sam Savage has put another brick in the wall with Distribution Processing and the Arithmetic of Uncertainty, an article in the ORMS Analytics Magazine (2012 Nov-Dec).

The article expands on the concept of SIPs (Stochastic Information Packets) as packaged uncertainty. It shows how to use SIP math and raw Excel to do Monte Carlo Simulation "without the Monte Carlo."

He also introduces SIPmath – an Excel add-in to simplify building models that use SIP math. Once the model is built the add-in is no longer needed and the simulation can run without it.

Probability Management is on a roll. Read the article and then go to sipmath.com to learn more.