Understanding Uncertainty Through Simulation with XLSim

Preface to XLSim 3.0 Tutorial

AnalyCorp has provided easy to use, analytical add-ins for Microsoft Excel since 1997 for educational and light commercial use. We continue this tradition with the Probilitech™ family of software tools designed to support the discipline of Probability Management. This new approach to simulation allows models to be consolidated and rolled up for effective enterprise-wide risk management. The first in this series is XLSim® 3.0, a Monte Carlo simulation package that is upwards compatible from our popular XLSim 2. Important new features include Interactive Simulation and the generation and interpretation of probability distributions in the DIST™ 1.0 Distribution String format. Its low cost and ease of use make XLSim 3.0 the ideal environment for teaching, prototyping and developing small Probability Management applications. Furthermore it can seamlessly exchange DIST 1.0 data with more powerful Probability Management software, such as Frontline System’s Risk Solver.

Introduction

Many people, when faced with an uncertainty, like future sales, or interest rate, succumb to the temptation of replacing the uncertain number in question with a single average value. I call this the Flaw of Averages, and it is a fallacy as fundamental as the belief that the Earth is flat. For information on my book on this subject, visit FlawOfAverages.com. Fortunately, today's computers can alleviate this problem through a technique known as Monte Carlo simulation. The name was applied during its use in the Manhattan atomic bomb project, and non-interactive simulation has been available in the spreadsheet environment on the Personal Computer since the mid 1980's. Recently, with the advent of interactive simulation, the field of Probability Management has emerged, to bring the power of simulation to an even broader audience. XLSim 3.0 has been designed to provide a simple but powerful introduction to Monte Carlo simulation and Probability Management for Excel spreadsheet users. The emphasis has been on ease of use rather than on power and features. This tutorial is comprised of two main parts: