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190 Applying simulation to decision problems
about the probability distributions which were elicited from him then
the effects of changes in these distributions on the simulation results
can be examined. There are several ways in which this sensitivity analysis
can be carried out (see, for example, Singh and Kiangi 2 ). It might
simply involve changing the distributions, repeating the simulation and
examining the resulting changes on the profit probability distribution.
Similarly, if the decision maker is not confident that the structure of
the model is correct then the effect of changes in this can be examined.
Clearly, if such changes have minor effects on the simulation results
then the original model can be assumed to be adequate.
Stage 7: Compare alternative course of action
You will recall that Elite Pottery had to make a decision between the
production of the commemorative plate and the figurine. The factors
which it was thought would affect the profit on the figurine were also
identified and a simulation carried out. This resulted in the probability
distribution shown below:
Profit on figurine
($) Probability
−300 000 to under −200 000 0.06
−200 000 to under −100 000 0.10
−100 000 to under 0 0.15
0 to under 100 000 0.34
100 000 to under 200 000 0.18
200 000 to under 300 000 0.08
300 000 to under 400 000 0.05
400 000 to under 500 000 0.04
Mean profit = $62 000
1.00
In order to help him to choose between the products the decision
maker clearly needs to compare the two profit probability distributions.
This comparison can be made in a number of ways.
Plotting the two distributions
By inspecting graphs of the two probability distributions the decision
maker can compare the probabilities of each product making a loss or