Sensitivity Analysis

I’m currently taking a unit called decision making, and in it we get quite into the nitty-gritty of this thing called sensitivity analysis. Sensitivity analysis is, in a nutshell, the study on how sensitive an output is to variations of input. For example, is one percent inspiration and 99 percent perspiration really needed for genius? How much can we take from perspiration to put into inspiration, and still maintain genius? The answer to that, of course, can be found through sensitivity analysis.

(A more detailed take on sensitivity analysis can be found here for those so inclined.)

Focusing on what Really Matters

One of the main purposes of sensitivity analysis is to find out what is important when it comes to making decisions.

For example, let’s say you had one hour of time and didn’t know where to spend it on. You’re really interested in making full use of that hour. You think for a moment, and decide that you want to spend that hour increasing your wealth.

You could choose to read a book on investing, or you could go rake your neighbour’s lawn for an hour and earn, say, $20. Let’s say you were a clairvoyant-in-training, and could predict roughly what consequences your actions would have. You look into your crystal ball and see that raking the lawn would bring you — lo-and-behold! — $20!

Not too impressed, you look again into your crystal ball and see that your reading the book on investing led you to enroll in an investing seminar, in which you met a man whom mentored you to become an extremely successful investor, consequently bringing you at least, as far as your limited clairvoyant abilities can tell, $20 million.

Where would you put your one hour’s worth of time now?

Making Decisions

I guess learning about this just makes me think more about where I spend my time (and money). It forces me to think about consequences as well: what impact does this activity (input) have on bringing me closer toward achieving my life goals (output)? Is there anything else I could be doing that would bring me even closer to the achievement of my life goals?

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