Flexibility and Real Estate Valuation under Uncertainty

8Interpreting Simulation Results: Target Curves and Scatterplots can be used to Graph the Distribution of the Sample Output

LEARNING OBJECTIVES

• Understand how to interpret the results of a simulation;
• Learn how to construct and interpret target curves;
• See how to use target curves to compare alternatives;
• See how target curves can indicate value at risk;
• Learn how to interpret scatterplots.

OUTLINE OF THE CHAPTER

1. 8.1 Target Curves
2. 8.2 Comparing Target Curves
3. 8.3 Value at Risk
4. 8.4 Scatterplots
5. 8.5 Conclusion

Let’s now focus on the output from a simulation analysis. It consists of the outputs of the analyses of many, many (for example, as we’ve said, 2000) possible future scenarios, the resulting possible outcomes of an investment or development project. How can we make sense of all this information?

We can quantitatively summarize and analyze such output in a variety of ways. Although summary statistics of the sample distribution are helpful for this purpose, we focus in this chapter on a particularly intuitive way in which we can display simulation results, to graph the distribution of the sample output. This chapter describes two important ways to do this: target curves and scatterplots.

8.1 Target Curves

Target curves are perhaps the most iconic representations of the simulation output. A target curve uses a simple line graph to depict the distribution of the simulated results. It plots the probability of occurrence (on the vertical axis) against some ...