What-if analysis

Definition

What-if analysis is a technique used to assess the potential outcomes of different scenarios by changing variables in a model. It helps decision-makers understand how alterations in inputs can impact the results, enabling them to evaluate risks and opportunities. This approach is closely tied to sensitivity analysis, which examines how sensitive an outcome is to changes in input parameters, and shadow prices, which provide insight into the value of resources that are constrained in a model.

5 Must Know Facts For Your Next Test

1. What-if analysis is essential for evaluating the robustness of a solution by testing various scenarios and input changes.
2. It allows users to visualize the impact of uncertainty in their assumptions on the overall model outcomes.
3. The results from what-if analysis can help in identifying which variables are most critical to achieving desired results.
4. In optimization problems, what-if analysis can provide insights into how shadow prices might change if resource constraints are altered.
5. This analysis is often implemented in spreadsheet software, where users can easily manipulate data and see immediate results.

Review Questions

• How does what-if analysis enhance the understanding of sensitivity in optimization models?
  • What-if analysis enhances the understanding of sensitivity in optimization models by allowing users to adjust key variables and observe how those changes affect outcomes. By doing this, decision-makers can identify which variables have the greatest influence on results. This understanding helps in optimizing resource allocation and improving decision-making under uncertainty, as it reveals critical dependencies between inputs and outputs.
• Discuss the relationship between what-if analysis and shadow prices in resource-constrained environments.
  • In resource-constrained environments, what-if analysis provides insight into how changes in constraints or available resources can alter shadow prices. Shadow prices indicate the value of relaxing a constraint, and through what-if analysis, one can simulate various scenarios to see how these values shift with different allocations or limitations. This relationship helps decision-makers understand the trade-offs involved in resource management and informs strategies for maximizing efficiency.
• Evaluate the effectiveness of what-if analysis as a decision-making tool compared to traditional forecasting methods.
  • What-if analysis is often more effective than traditional forecasting methods because it allows for dynamic exploration of multiple scenarios rather than relying on a single predicted outcome. By simulating various changes to inputs, decision-makers can assess potential risks and rewards across a range of possibilities. This flexibility enables organizations to develop more robust strategies that account for uncertainty, making what-if analysis a valuable tool in complex environments where assumptions may not hold true.

Related terms

Sensitivity Analysis: A method to determine how different values of an independent variable impact a particular dependent variable under a given set of assumptions.

Shadow Price: The estimated worth of an additional unit of a resource in a constrained optimization problem, reflecting the trade-offs involved.

Scenario Planning: A strategic planning method that organizations use to create flexible long-term plans based on different potential future scenarios.