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Sensitivity Analysis, Advantages

What is sensitivity analysis?

Every now and then you are confronted with a situation where you have to make a decision in a bit of uncertainty. You wish if there was a tool available that can just tell you what would be the output if the input values that you have were different from what you have assumed. Sensitivity analysis is one such tool that can determine the effect of varying input in the output of the system. For example, while making a budget for your organization, you may not be able to identify all the expenses or amount of expenses beforehand with accuracy and precision, so you need a way to analyze the outcome of tweaking the value of one or two expense values, so that you can at least identify the range in which budget value will be.

Advantage of sensitivity analysis

Sensitivity analysis helps you in not only identifying the most important parameters, but also some alternate decisions to finally come up with optimal decision. It supports decision making or helps in developing recommendations for decision making. It helps modelers formulating their communications or presentations to decision makers. It helps in understanding the relationship between input and output, for example, if output changes with the change in a certain input variable value, then system is not sensitive to that input variable.

Sensitivity analysis might end up revealing surprising results. They can help in distinguishing critical variables from important variables. Change in the value of a critical variable value will end up causing a significant change in the final outcome, but variation in important variable value will not cause that much significant change. So, sensitivity analysis helps in identifying the most important assumption or scenario which has biggest effect and contribution on the final outcome.

Sensitive analysis can help in playing what-if analysis exploring the effect of changing certain assumption. It helps in guiding future data collections for a business and optimizing resource allocation. It also helps in understanding the tolerance of a manufactured part.

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