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Sensitive Analysis (Project Management)

Sensitivity analysis is a technique used to determine how changes in independent variables impact dependent variables under given assumptions. It involves varying inputs within a model and observing the outputs to see which inputs have the greatest influence. There are two main approaches: local sensitivity analysis, which varies one input at a time, and global sensitivity analysis, which uses techniques like Monte Carlo simulation to explore the entire design space. Sensitivity analysis is useful for decision making by indicating how sensitive outputs are to uncertainties in inputs and helping identify risks associated with different strategies.

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456 views2 pages

Sensitive Analysis (Project Management)

Sensitivity analysis is a technique used to determine how changes in independent variables impact dependent variables under given assumptions. It involves varying inputs within a model and observing the outputs to see which inputs have the greatest influence. There are two main approaches: local sensitivity analysis, which varies one input at a time, and global sensitivity analysis, which uses techniques like Monte Carlo simulation to explore the entire design space. Sensitivity analysis is useful for decision making by indicating how sensitive outputs are to uncertainties in inputs and helping identify risks associated with different strategies.

Uploaded by

riya bhowmik
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Sensitivity Analysis

What is Sensitivity Analysis?


The technique used to determine how independent variable values will impact a particular dependent
variable under a given set of assumptions is defined as sensitive analysis. Its usage will depend on
one or more input variables within the specific boundaries, such as the effect that changes in interest
rates will have on a bond’s price.
It is also known as the what – if analysis. Sensitivity analysis can be used for any activity or system.
All from planning a family vacation with the variables in mind to the decisions at corporate levels can
be done through sensitivity analysis.

Sensitivity analysis works on the simple principle: Change the model and observe the behaviour.
The parameters that one needs to note while doing the above are:
A) Experimental design: It includes combination of parameters that are to be varied. This includes a
check on which and how many parameters need to vary at a given point in time, assigning values
(maximum and minimum levels) before the experiment, study the correlations: positive or negative
and accordingly assign values for the combination.
B) What to vary: The different parameters that can be chosen to vary in the model could be:
a) the number of activities
b) the objective in relation to the risk assumed and the profits expected
c) technical parameters
d) number of constraints and its limits
C) What to observe:
a) the value of the objective as per the strategy
b) value of the decision variables
c) value of the objective function between two strategies adopted

Measurement of sensitivity analysis


Below are mentioned the steps used to conduct sensitivity analysis:

1. Firstly, the base case output is defined; say the NPV at a particular base case input value
(V1) for which the sensitivity is to be measured. All the other inputs of the model are kept constant.
2. Then the value of the output at a new value of the input (V2) while keeping other inputs
constant is calculated.
3. Find the percentage change in the output and the percentage change in the input.
4. The sensitivity is calculated by dividing the percentage change in output by the percentage
change in input.
This process of testing sensitivity for another input (say cash flows growth rate) while keeping the rest
of inputs constant is repeated until the sensitivity figure for each of the inputs is obtained. The
conclusion would be that the higher the sensitivity figure, the more sensitive the output is to any
change in that input and vice versa.

Methods of Sensitivity Analysis


There are different methods to carry out the sensitivity analysis:

 Modelling and simulation techniques


 Scenario management tools through Microsoft excel
There are mainly two approaches to analysing sensitivity:

 Local Sensitivity Analysis


 Global Sensitivity Analysis
Local sensitivity analysis is derivative based (numerical or analytical). The term local indicates that
the derivatives are taken at a single point. This method is apt for simple cost functions, but not
feasible for complex models, like models with discontinuities do not always have derivatives.
Mathematically, the sensitivity of the cost function with respect to certain parameters is equal to the
partial derivative of the cost function with respect to those parameters.
Local sensitivity analysis is a one-at-a-time (OAT) technique that analyses the impact of one
parameter on the cost function at a time, keeping the other parameters fixed.
Global sensitivity analysis is the second approach to sensitivity analysis, often implemented using
Monte Carlo techniques. This approach uses a global set of samples to explore the design space.
The various techniques widely applied include:

 Differential sensitivity analysis: It is also referred to the direct method. It involves solving
simple partial derivatives to temporal sensitivity analysis. Although this method is
computationally efficient, solving equations is intensive task to handle.
 One at a time sensitivity measures: It is the most fundamental method with partial
differentiation, in which varying parameters values are taken one at a time. It is also called as
local analysis as it is an indicator only for the addressed point estimates and not the entire
distribution.
 Factorial Analysis: It involves the selection of given number of samples for a specific
parameter and then running the model for the combinations. The outcome is then used to
carry out parameter sensitivity.

Through the sensitivity index one can calculate the output % difference when one input parameter
varies from minimum to maximum value.

 Correlation analysis helps in defining the relation between independent and dependent


variables.
 Regression analysis is a comprehensive method used to get responses for complex models.
 Subjective sensitivity analysis: In this method the individual parameters are analysed. This
is a subjective method, simple, qualitative and an easy method to rule out input parameters.

Using Sensitivity Analysis for decision making

One of the key applications of Sensitivity analysis is in the utilization of models by managers and
decision-makers. All the content needed for the decision model can be fully utilized only through the
repeated application of sensitivity analysis. It helps decision analysts to understand the uncertainties,
pros and cons with the limitations and scope of a decision model.
Most if not all decisions are made under uncertainty. It is the optimal solution in decision making for
various parameters that are approximations. One approach to come to conclusion is by replacing all
the uncertain parameters with expected values and then carry out sensitivity analysis. It would be a
breather for a decision maker if he/she has some indication as to how sensitive will the choices be
with changes in one or more inputs.

Uses of Sensitivity Analysis

 The key application of sensitivity analysis is to indicate the sensitivity of simulation to


uncertainties in the input values of the model.
 They help in decision making
 Sensitivity analysis is a method for predicting the outcome of a decision if a situation turns out
to be different compared to the key predictions.
 It helps in assessing the riskiness of a strategy.
 Helps in identifying how dependent the output is on a particular input value. Analyses if the
dependency in turn helps in assessing the risk associated.
 Helps in taking informed and appropriate decisions
 Aids searching for errors in the model

Conclusion

Sensitivity analysis is one of the tools that help decision makers with more than a solution to a
problem. It provides an appropriate insight into the problems associated with the model under
reference. Finally, the decision maker gets a decent idea about how sensitive is the optimum solution
chosen by him to any changes in the input values of one or more parameters.

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