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# Desktop Business Analytics -Decision Intelligence

Risk Analysis
Optimization

Current Products

Crystal Ball

simulation

CB Predictor

Carlo

CB Turbo

simulations

## Monte Carlo Applications

Capital Budgeting
New Venture Planning
Manufacturing Planning
Marketing Planning
Quality Design
Environmental Risk
Petroleum Exploration

Easy to use
Popular
Flexible model-building tool

What-if Analysis

## Methodically entering even increments

of values to view the projected
outcomes
Pros: Reveals incremental range of possible
outcomes
Cons: Time-consuming, Results in a mountain
of data, Reveals what is possible, not what is
probable

What is missing?

## The ability to know the range of possible

outcomes and their likelihood of occurrence

## As a result, we use Monte Carlo Simulation

as a system that uses random numbers to
measure the effects of uncertainty on our
decision-making process

What is Simulation?
Modeling a real system to learn
The model is a set of mathematical
and logical relationships
You can vary conditions to test
different scenarios

Inexpensive to evaluate decisions
before implementation
Reveals critical components of the
system
Excellent tool for selling the need for
change

of input data

## Garbage in, Garbage out

Intelligent agents using secret rules

## The Five Steps of

Model Development
1. Develop a system flow diagram
2. Write an Excel spreadsheet to model the system

## 3. Use Crystal Ball to model uncertainty

4. Run the simulation and analyze the output

2+2 = 4 ?

## Crystal Ball Pro

Decision Intelligence
Includes

Crystal Ball
Optimization
Extenders
Developer Kit

Optimization Model

Decision Variables
Quantities

## over which you have control

(Accept or reject each project)
Upper and lower bounds
Continuous or discrete

Optimization

Function

## Find the possible input values that make

the output as large or as small as possible

F(X) = Y

Project Selection

Project Mix

Model

## Find the project mix that generates

the highest combined NPV

Combined
NPV

A Realistic Model

Uncertainty analysis
Constraints and Requirements

## We will us the simplifying assumption of applying a

budgetary constraint to limit investment

## Never try to walk across a river just

because it has an average depth of four
feet.

Milton Friedman

## Professors and students have used

many techniques
Inaccessible

Difficult

to implement
Clients do not understand the results

modeling.

## How are you handling

uncertainty?
Do you use low, middle and high
values?
Do you do What-if analysis?

Multiple What-if
scenarios confuse as
much as enlighten...

A Picture is Worth...

A thousand What-ifs

Decisioneering, Inc.
Provider of Analytic Tools since 1986
USA
More than 70,000 Users
85% of Fortune 500 Companies
45 of Top 50 Business Schools
65% CAGR over 3 Years

Monte Carlo

## Random number generation simulates

the uncertainty in the assumptions. The
program selects a value for the
assumption, recalculates the
repeats.

Deterministic v. Stochastic
Deterministic
Fixed
Data

Fixed Outcomes
\$1,200,00

7%
Stochastic
Variable
data

Variable
Outcomes

M onthly S a v ings

## Forecast: Scenario A Retirement Portfolio

500 Trials

Frequency Chart

6 Outliers

.09 4

47

.07 1

3 5 .2 5

.04 7

2 3.5

.02 4

1 1 .7 5

M e an = \$6 46,19 8
.00 0

3 5 0 .0 0

4 2 5 .0 0

5 0 0 .0 0

5 7 5 .0 0

6 5 0 .0 0

0
\$3 00,00 0

\$5 25,00 0

\$7 50,00 0
D o l l a rs

\$9 75,00 0

\$ 1 ,2 0 0 , 0 0 0

Statistics

## Normal Distribution, Mean and Standard

Deviation
M o n th ly S a v in g s

Mean

Standard Deviation
3 5 0 .0 0

4 2 5 .0 0

5 0 0 .0 0

5 7 5 .0 0

6 5 0 .0 0

Retirement Example
Monthly Dollar Saving
Number of Years
Annual Growth Rate

Value at Retirement

Uncertainty

500
20
12%

432,315

Define Assumptions

## Retirement Example Assumptions

Retirement Example
Assumptions

Retirement ExampleForecasts

Retirement Example
Forecasts

Communicating Results
Get the client to understand alternatives
Take action

## Uncertainty over time

Compare Alternatives