Atomic Bomb Methods May be Your Best Bet for Business DecisionMaking



Business managers who find that projects always seem to run late, cost overruns are all too common, and actual results are not even close to projections may sometimes feel like using methods akin to an atomic bomb. And in fact Monte Carlo methods, invented to solve key problems in developing the atomic bomb in the 1940s, may be just what those managers need.

New online tutorials for risk analysis __title__ Risk Analysisand Monte Carlo simulation

During World War II, scientists John von Neumann, Stanislaw Ulam, and Nicholas Metropolis, working intensively on the Manhattan project, had to model what would happen in a chain reaction in highly enriched uranium -- and they couldn't afford to have actual results depart greatly from their projections. But their models were too complex to describe and solve with algebraic equations.

Hence, the scientists had to resort to numerical methods -- basically plugging many different numbers into the equations and calculating the result. Their first 'computers' were actually people using calculators and early IBM punched-card machines; later, they used electronic computers such as MANIAC. But they found that their problem had so many dimensions that systematically plugging in and trying numbers in all these dimensions took far too long.

So they created an entirely new approach -- plugging in randomly chosen numbers into the equations and calculating the results. Although they could only test thousands rather than trillions of combinations of numbers, by sampling random numbers __title__ sampling random numbers (http://www.solver.com/risk-analysis/tools.htm)to cover the many dimensions of the problem, and analyzing the results with statistics, they were able to make very good predictions -- and in fact guide the design of an atomic bomb that ultimately ended World War II.

More than 60 years later, managers face business problems than often seem as difficult as the design of an atomic bomb -- and in mathematical terms, they often are. Models of production processes, sales response to pricing, competitor actions and promotion, or allocating funds to capital projects are usually too complex to solve with algebraic equations.

Every manager has ready access to PCs that are far more powerful than MANIAC, and nearly every manager knows how to build a 'what-if' spreadsheet model, plug in numbers, and calculate results. But -- as in the atomic bomb -- business models usually involve so many dimensions that plugging in numbers and asking 'what if' cannot cover all the outcomes. Too often, the actual outcome falls outside the range of results that were considered.

But today, Monte Carlo methods __title__ Monte Carlo methodsfor risk analysis are available to every manager in the form of easy-to-use software, such as Frontline Systems Risk Solver

Frontline Systems, Inc. (www.solver.com) is a leading developer of optimization and simulation software. Frontline developed the solvers/optimizers in Microsoft Excel, Lotus 1-2-3 and Quattro Pro, distributed to more than 400 million spreadsheet users. Founded in 1987, Frontline is based in Incline Village, Nevada (775-831-0300).





Atomic Bomb Methods May be Your Best Bet for Business DecisionMaking