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Exhibit 8.4 Risk profiles for various sample sizes
6. In summary, the Monte Carlo methodology for simulation, as we will implement
it, requires the following : (a) develop a complete definition of the problem, (b)
determine the elements of the model that are uncertain and the nature of the
uncertainty in terms of a probability distribution that represents its behavior, (c)
implement the uncertain elements by using the RAND() or other Excel func-
tions, (d) replicate a number of experiments sufficient in size to capture accurate
behavior, (e) collect data from experiments, (f) present the risk profiles result-
ing from the experiments, (g) perform sensitivity analysis on results, and (h)
make the appropriate decisions based on results and the decision maker’s attitude
toward risk.
These steps represent a systematic approach for modeling processes and con-
ducting simulation experiments.
At this point, it is wise for us to turn to a discussion of probability distribu-
tions (probability density functions for Continuous distributions) in a bit more detail.
Since it will be of utmost importance that we incorporate uncertainty into our MCS,
we will need a basic understanding of how we specify uncertain events. We will
introduce the basics of a Poisson Arrival process in the next section, but this is just
one way to deal with arrival uncertainty. There are many other ways to describe
uncertain arrivals. In the discussion that follows, we will consider some commonly
used probability distributions and density functions.
8.3.2 A Word About Probability Distributions
Obviously, we could devote an entire topic to this topic, but in lieu of a detailed dis-
cussion, there are a number of issues that are essential to understand. First, there are
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