Methodologies

When making investment or strategic decisions, an economic evaluation of some kind will be required. Hardly ever will such evaluations be made in the absence of uncertainty and risk.

To assess the well quantifiable risks, such as cost uncertainties, use can be made of sensitivity analysis, decision trees or Monte Carlo simulations to estimate the impact of the uncertainties on the decision metrics. If the uncertainties are less tangible, for example political or regulatory risk, it may be difficult or impossible to credibly quantify them. In those situations scenario analysis is a useful approach. A combination of quantitative risk analysis and qualitative narratives is required to provide a good understanding of the risk and uncertainty spectrum of an investment opportunity or strategic direction.

NavIncerta offers some very  specific expertise that will not easily be found elsewhere:

deltalog logo leegThe DeltaLogN method is an analytical approach for probabilistic modelling. It is a fast and efficient alternative to Monte Carlo simulation. It is composed of a sophisticated mathematical articulation involving skew preservation which can be coded in a spreadsheet using just a few cells. The results of the analysis are very close to the outcome of simulations. However, DeltaLogN is much simpler to apply, not requiring any special software.

RQProper and credible risk quantification is crucial for robust analysis. Risks for an opportunity, of whatever nature, need to be properly identified and articulated. It is essential to compile enough ‘evidence’ before proper (judgemental) quantification can take place, with the right people involved, requiring good facilitation.

fs2The scenario method is successfully employed by companies and institutes to develop a better understanding of the complexity of the business environment and how it may evolve in the future. Although this is a useful activity in its own right, the method will be even more powerful if the scenario analysis can be applied to and made relevant for specific strategic decisions. We call this Focused Scenario Analysis.