CHAPTER ELEVEN
Perform Probabilistic Analysis and Identify Insights
An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.
—Jack Welch
11.1 Introduction
11.2 Exploration of Uncertainty: Decision Trees and Simulation
11.2.1 Decision Trees
11.2.2 Simulation
11.2.3 Choosing between Monte Carlo Simulation and Decision Trees
11.2.4 Software for Simulation and Decision Trees
11.3 The Value Dialogue
11.3.1 P&L Browsers
11.3.2 Total Value and Value Components
11.3.3 Cash Flow over Time
11.3.4 Direct EV Tornado Diagram
11.3.5 Delta EV Tornado Diagram
11.3.6 One-Way and Two-Way Sensitivity Analysis
11.3.7 Value of Information and Value of Control
11.3.8 Real Options
11.3.9 S-Curves (Cumulative Probability Distributions)
11.3.10 Flying Bar Charts
11.4 Risk Attitude
11.4.1 Delta Property
11.4.2 Exponential Utility
11.4.3 Assessing Risk Tolerance
11.4.4 Calculating Certain Equivalents
11.4.5 Evaluating “Small” Risks
11.4.6 Going Beyond the Delta Property
11.5 Illustrative Examples
11.5.1 Geneptin Example
11.5.2 Data Center
11.6 Summary
Key Terms
References
11.1 Introduction
Previous chapters discuss initial development of a composite perspective on what drives value for the decision. To improve and exploit the composite perspective, we must find ways to understand the behavior of value that emerges from this model and test these against individuals’ perspectives. For decisions involving significant ...
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