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Desktop Business Analytics -Decision Intelligence

Time Series Forecasting


Risk Analysis
Optimization

Current Products

Crystal Ball

Crystal Ball Pro

Integrated Optimization and Monte Carlo


simulation

CB Predictor

Excel-based Monte Carlo simulation

Integrated Time-Series Forecasting with Monte


Carlo

CB Turbo

Distributed Processing capability to speed up


simulations

Monte Carlo Applications


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

Spreadsheets - Pros
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
about its behavior
The model is a set of mathematical
and logical relationships
You can vary conditions to test
different scenarios

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

Disadvantages of Simulation

Results are sensitive to the accuracy


of input data

Garbage in, Garbage out


Intelligent agents using secret rules

Investment in time and resources

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

5. Improve the model and/or make decisions

Crystal Ball Demonstration

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

The Flaw of Averages

Never try to walk across a river just


because it has an average depth of four
feet.

Milton Friedman

Academic v. Real World

Professors and students have used


many techniques
Inaccessible

Difficult

to implement
Clients do not understand the results

Decisioneering makes Monte Carlo easy


to use in everyday spreadsheet
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
Headquartered in Denver, Colorado,
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
spreadsheet, plots the forecast and
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