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Sensitivity analysis

What is Sensitivity Analysis?

Sensitive Analysis is a quantitative model and is part of the Decision Support System or DSS which models information to support managers and business professionals during the decision-making process. According to “Business Driven Information Systems” by Baltzan and Phillips, sensitivity analysis is defined as the study of the impact that changes in one or more parts of the model have on other parts of the model. Users change the value of one variable repeatedly and observe the resulting changes in other variables. This is the reason why sensitivity analysis is part of DSS because it is used to deliver variable information for decision makers.

How is it used?

According to WikiAnswer.com sensitivity analysis is a type of analysis that shows how a particular scenario can be affected by multiple variables. A good example is Microsoft Excel application. When one creates a model calculation for monthly home mortgage, Excel can provide expected results using variables in sensitivity analysis model.

Interestingly enough, some experts refer sensitivity analysis to What-If analysis. According to Dan Power, an editor from DSSResource.com, there are four tools in Excel that are categorized as What-If or sensitivity analysis tools. They are Data Tables, Goal Seek, Scenarios, and Solver. Further, he mentioned that some Excel experts use the terms sensitivity analysis model and What-If analysis interchangeably.

In Wikipedia.org, sensitivity analysis refers to “the study of how the variation or uncertainty in the output of a model can be apportioned, qualitatively and qualitatively, to different sources of variation.” The sensitivity analysis model relies on the output of a mathematical model such as a series of equations, input factors, parameters, and variables; mathematical model uses mathematical language to describe a system.  Further, the website explain that sensitivity analysis is used widely at national and international government agencies such as the White House Office of Management and Budget, the US Environmental Protection Agency, and the European Commission. This is because sensitivity analysis model involves variable inputs as necessary and essential ingredients for quality assurance. Sensitivity analysis model is used best for What-If analysis to explore the impact of variable inputs in assumptions and scenarios. 

We may not realize that sensitivity analysis is a very common tool in business and financial applications, risk analysis, environmental models such as global climate model. Wikipedia.org states that sensitivity analysis can serve as a tool to understand the various sources of uncertainty to the model outputs although different sampling strategies may be recommended to “cover multivariate sensitivity analysis.”

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