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Simulation Modeling H

Simulation Modeling H - Simulation Modeling with Builtin...

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1              Simulation Modeling with  Built-in Excel Tools

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2              Announcements To download DecisionTools Suite to your computer, you have  to go to the "Resources" area of the KCC Intranet, then look  under "Configuring/Installing Software" and you'll find links  to instructions for each of the recent versions of Windows. https://intra.krannert.purdue.edu/admin/kcc/Pages/Resources.aspx   Computer Lab on Monday, October 24.
3              Why is simulation useful? Consider two investment alternatives: A: Invest \$10,000. Probability of a \$100,000 gain is 0.10 Probability of a \$10,000 loss is 0.90 B: Invest \$10,000 Probability of a \$500 gain is 1.0 Which would you choose? Why?

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4              Investments Analysis On Average, option A is twice as good as option B! Do we ever actually receive the average? Decisions made based only on the average can be very poor. Other examples Product development Insurance
5              Risk-Informed Decision Making Appropriate and inappropriate uses of averages. Managers manage risk. Simulation gives us a tool to help us evaluate risk. Risk: The uncertainty associated with an undesirable  outcome. Risk is not the same as just being uncertain about something, and is  not just the  possibility  of a bad outcome. Risk considers the  likelihood  of an undesirable outcome (e.g., the  probability) as well as the  magnitude  of that outcome.

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6              “Flaw of Averages” (Sam Savage) Article by Sam Savage  (http://www.stanford.edu/~savage/faculty/savage/ )
7              Simulation Model  A simulation model is a  computer model  that imitates  a real-life  situation. Like other decision models, it has  parameters  (uncontroll-able  inputs),  decision variables  (controllable inputs), and  outputs   (objective, consequences, etc.) Simulation model incorporates  uncertainty  in one or more  parameters (uncontrollable inputs)  Simulation Model Parameters Decision Variables Objective Consequences Determined by  decision-maker Some of them are  random inputs Probability and  statistics Spreadsheet

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8              How Does Spreadsheet Simulation Model Work? We begin with input variables and then relate them with  appropriate Excel formulas to output variables of interest. Simulation uses random numbers, which represent uncertain  parameters, to drive the whole simulation process.
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