Where I left off last time was lamenting the use of Monte Carlo simulation to create a single value (statistic etc.) from a model. It might still not be clear why this is anathema to me, so here goes.
A simulation is not a number. It’s not one possible (future) outcome – that’s a scenario. Monte Carlo simulation is a methodology for understanding one’s exposure to outcomes not situated close to the central tendency of the process/project in question. Note the plural “outcomes”. Risk analysis, when done properly, should let you know essentially all possible outcomes and how likely they are for your model. Output from a simulation can include a plot of means (over time), or P5s, or P95s, or the mean ± one standard deviation or any number of statistics. But that’s not plotting a simulation! Let’s not give a minimalist graph too much credit.
Such statements also perpetuate the idea that simulation is only used for creating means (or other centrally tending statistics) and ignores the wealth of information available. Risk simulation software exists to help you do risk analysis which must include not only several statistics but also sensitivity information. It is all too easy to turn a risk assessment into a hunt for a regularly asked for percentile (such as the P90) and there ends the task. I see this a lot, especially in project cost estimation where the pressure both from management and regulatory bodies is to accurately estimate some large percentile. Once found there is usually scant further risk analysis.
Nothing good ensues. When risk analyses are run “to get ‘the’ number” they become simply another box to tick in a process and ultimately any benefits (perceived or actual) will be forgotten and lost to the ages. The notion of context is also lost. No single number by itself really means anything, or at least shouldn’t mean anything to a decision maker. I have often heard phrases like “the model returned/gave $1.2m” followed by an audience nodding in agreement. Huh? Which statistic are you talking about there, and how about reporting a few other numbers around it to place that $1.2m somewhere meaningful?
In the next installment I will look further into this issue of context and hopefully prove the necessity of an holistic approach to understanding and reporting simulation results.
» Part 1