risk and uncertainty

Both of these are very rarely mentioned in F5 – they are mainly a Paper F9 topic.

They both relate to uncertainty in factors used in making decisions.

Sensitivity analysis calculates the % change in an uncertain factor that would be needed for the decision to change. The smaller the % then the more worried you would be about the decision because a small change in one of the numbers would mean you had made the wrong decision.

Simulation takes all the possible values there can be of all the uncertain factors, and calculates what the final outcome would be for all of them (using a big spreadsheet). Then we can look at which outcomes are ‘good’ and which are ‘bad’ and see the probability of ending up with a ‘good’ outcome.