# Making Optimal Choices, or Just Making Choices? Part 1

Something has troubled me for some time regarding the choices being made in risk land. I train and work with many clients whom have adopted Monte Carlo simulation techniques (via @RISK for Excel) into the day-to-day running of their businesses. By doing so they (hopefully) now have a good understanding of the exposure they are facing be it in project cost estimation, discounted cash flow analysis or, well, anything really. But this is only one facet of risk and decision assessment, specifically dealing with the descriptive statistical output from a simulation. What of the decision evaluation component? Why aren’t more of my customers analysing the decisions they make, or better yet actually optimising them? I have a few ideas why.

If you’re in business you have to make decisions. Big ones, little ones, yes/no, multiple state and continuous value decisions. Decisions that impact other decisions in simple or complex dependency structures. But are you making the best decisions possible? I’m sure important decisions aren’t being made completely randomly (I hope!) but I see many companies who rely completely upon qualitative techniques for their decision making (experience, gut feel, etc.) which of course means optimality is no more than a hoped for outcome rather than something that is actually being worked towards.
Firstly the decision model must be identified and then quantified, and this can be a difficult task. There is a level of modelling aptitude necessary for effective modelling that goes beyond merely knowing Excel and its functions, and into the construction of logical mathematical descriptions of possibly complicated processes. Relevant decisions need to be identified and the impact of those decisions combined into a formula that can be mathematically optimised. A critical component to all this is the knowledge that spreadsheet models can actually be optimised, and that in cases where Excel’s Solver fails there are Palisade products (Evolver and RISKOptimzer) that can perform optimisations under virtually any circumstance.

I too used to focus on Monte Carlo simulation rather than decision evaluation, and this was mainly a product of the clients I was dealing with almost exclusively when I first worked for Palisade. In my next blog I’ll tell you why that changed and also get a little more into the nuts and bolts of optimisation.

Rishi Prabhakar
Trainer/Consultant