Uncertainty Management

SCO 6041 Class 7

Uncertainty Management
Agenda
PERT Analysis
Monte-Carlo Analysis

The Role of Chance

Source: Dilbert Comic Strips Archive

http://www.dilbert.com/strips/

A Roadmap

Uncertainty

An understanding that important

aspects of the project are not
determined, but rather random
variables with probability
distributions. Examples: payoffs,
task durations, etc.

Focus of this chapter

Risks

A knowledge that the project

depends on the outcomes of
certain events in the future that
can be fully described by their
probability distributions.
Examples: Market entry of
competitors, outcome of drug
trials, etc.

Ambiguity

An awareness that the project is

influenced by unforeseeable
events, which cannot be
predicted, and are not even
recognized at the time of project
planning.

Key Ideas of This Class

Instead of taking task durations as determined, we treat
them as random variables
We can then calculate the likelihood of finishing the
project by a certain time
This can serve as a basis for determining the right
project buffer
Topic Objective: Establish better estimates of
task duration, buffers, and project completion
5

Central Assumption
Task Durations follow a Beta Distribution (right skewed)

Bounded by Min & Max (in

contrast to Normal distribution)

Mean
(Average Time)
Mode
Minimum Time
(Optimistic Estimate) (Most likely time)

Maximum Time
(Pessimistic Estimate)
6

Central Assumption
Task Durations follow a Beta Distribution (centered)

Mean
(Average Time)
Minimum Time
(Optimistic Estimate)

Maximum Time
(Pessimistic Estimate)
7

Central Assumption
Task Durations follow a Beta Distribution (left skewed)

Mean
(Average Time)
Minimum Time
(Optimistic Estimate)

Mode
(Most likely time)

Maximum Time
(Pessimistic Estimate)
8

PERT
Program Evaluation and Review Technique
(PERT)
Developed by U.S. Navy in 1950s
Navy Special Projects Office
Polaris submarine weapon system
. With units of time as a common denominator, PERT quantifies knowledge
about the uncertainties involved in developmental programs requiring effort at
the edge of, or beyond, current knowledge of the subject effort for which little
or no previous experience exists. .
Willard Fazar (Head, Program Evaluation Branch, Special Projects Office, U. S. Navy),
The American Statistician, April 1959.

PERT Analysis
Step 1: Instead of asking for task durations, ask for
optimistic, pessimistic and most likely
Task
A

Optimisti
Most Likely
c
1
2

Pessimistic
3

11

13

15

10

12

10

15

23

14

11

16

21

35

10

14

Optimistic = Minimum Time

Most Likely = Mode
Pessimistic = Maximum Time

10

PERT Analysis
Step 2: Calculate the mean and variance of each
task duration using the following formulas:

Optimistic Pessimistic 4* MostLikely

6

Pessimistic Optimistic
2

36

11

PERT Analysis
Step 2: Calculate the mean task duration, and the variance
of each task duration
Task
A
B
C
D
E
F
G
H
I
J
K
L
M
N

Optimisti
Mea
Most Likely Pessimistic
c
n
1
2
3
2
7
8
9
8
11
13
15
13
8
10
12
10
10
15
23
15.5
4
7
14
7.67
2
4
11
4.83
3
4
7
4.33
16
21
35
22.5
4
5
6
5
2
2
2
2
2
2
2
2
10.3
8
10
14
3
1
1
1
1

Variance
.11
.11
.44
.44
4.69
2.78
2.25
.44
10.03
.11
0
0
1
0
12

PERT Analysis
Step 3: Schedule the Project Using Mean Durations
2

Task A
2 days
0 slack

Earliest
Start

Earliest
Finish

ES

EF

LS

LF

10

10

23

23

33

Task B
8 days
0 slack

Task C
13 days
0 slack

Task D
10 days
0 slack

10

10

23

17.5

17.5 25.2

25.2 30

Task E
15.5
days
3 slack
5 20.5

Task F
7.67
days
3 slack
20.5 28.2

Task G
4.83
days
3 slack
28.2 33

23

33

Task J
5 days
42.5
slack
44.5 49.5

37.3 59.8

33 37.3

Task H
4.33
days
0 slack
33 37.3

Task I
22.5
days
0 slack
37.3 59.8
37.3 39.3

Task K
2 days
20.5
slack
57.8 59.8

Task L
2 days
45.8
slack
55.8 57.8

Note: I have assumed

that a second Product
Architect was hired (no
resource conflict) and
that K has to come after
L (no resource conflict
for product manager).
See case.

59.8 60.8

Task N
1 day
0 slack
7

17.3

Task M
42.5
days
44 slack
49.5 59.8

59.8 60.8

13

PERT Analysis
Step 4: Calculate Mean & Standard Deviation of
Critical Path
0

10

10

23

23

33

Task A
2 days
0 slack

Task B
8 days
0 slack

Task C
13 days
0 slack

Task D
10 days
0 slack

10

23

10

23

33

33 37.3

37.3 59.8

Task H
4.33
days
0 slack
33 37.3

Task I
22.5
days
0 slack
37.3 59.8

59.8 60.8

Task N
1 day
0 slack
59.8 60.8

Mean
()

13

10

4.33

22.5

60.8

Varianc
e
(2)

.11

.11

.44

.44

.44

10.03

11.6

3.4

Standar
d
Deviati
on
()

Assume independence between tasks

(allows variances to be additive)

14

PERT Analysis
Step 5: Plot cumulative normal distribution
1
0.9
0.8
0.7
0.6
0.5
0.4
Cumulative Probability

0.3
0.2
0.1
0

Project Duration

15

PERT Analysis
Hint: To plot the cumulative normal distribution in
Excel, create (and then plot) the following Table:
X-Axis

Y-Axis

50

=NORM.DIST(50,,,1)

51

=NORM.DIST(51,,,1)

70

=NORM.DIST(70,,,1)

16

PERT Analysis
Step 5: Why Normal Distribution?
Central Limit Theorem: The sum of several
random variables with any (though identical)
distribution is approximately normally
distributed

17

PERT Analysis
Step 5: Plot cumulative normal distribution
1
0.9
0.8

There is a 90%
chance of the
project finishing in
less than 65 days.

0.7
0.6
0.5
0.4
Cumulative Probability

0.3
0.2
0.1
0

Project Duration

18

PERT Analysis
Step 5: Plot cumulative normal distribution
1
0.9
0.8
0.7
0.6

There is a 70%
chance of the
project finishing in
less than 63 days.

0.5
0.4
Cumulative Probability

0.3

In Excel, use
=NORMINV(0.70,60.8,3.4)

0.2
0.1
0

Project Duration

19

PERT Analysis
Step 6: Understand Uncertainty
Total Time until
Project is Due

Likelihood of
Finishing the
Project on Time

61

50%

62

60%

63

70%

64

80%

65

90%

69

99%
20

PERT Analysis
Step 7: Planning Project Buffers
Likelihood of
Finishing the
Project on Time

Total Time until

Project is Due

Project Buffer
(Days)

50%

61

60%

62

70%

63

80%

64

90%

65

99%

69

8
21

PERT - Criticisms
PERT assumes that the critical path remains
constant but uncertainty in task durations implies
that critical paths may change
PERT assumes that task durations are
independent of each other but since the same
people were involved in creating different estimates,
and since the same resources may be involved in
different tasks, this assumption may not hold
22

Monte Carlo Simulations

A lot of times we have to make assumptions
simply to know what a distribution looks like.
If uncertain events interact in complex ways,
we often have no clue what the real underlying
distribution looks like but we can simulate it!

23

Monte Carlo Simulations

Example of a known distribution: Rolling a dice
0.35
0.3
0.25
0.2
Probability

0.15
0.1
0.05
0
-0.05

Outcome

Expected Value: 3.5

24

Monte Carlo Simulations

What does the distribution of the maximum of
two dice look like?
D1

D2

Score

D1

D2

Score

D1

D2

Score

D1

D2

Score

D1

D2

Score

D1

D2

Score

25

Monte Carlo Simulations

What does the distribution of the maximum of
two dice look like?
0.35
0.30
0.25
0.20
Probability

0.15
0.10
0.05
0.00

Expected Value: 4.47

Outcome

26

Monte Carlo Simulations

Suppose I offer you the following gamble: I get to roll
a dice. You get to roll two dice, record the maximum,
then re-roll the dice, record the minimum, and your
score is the maximum-minimum. If I beat you, I get $1
from you, if you beat me, you get $1 from me.
Is this a good gamble?
We can simulate this by throwing a lot of dice and
recording the results. Fortunately, there is software that
can do this for us
27

Monte Carlo Simulations

This is the Probability Distribution of your
Score

28

Monte Carlo Simulations

Your Probability of Winning: 23%
Your Probability of Drawing: 13%
Your Probability of Loosing: 64%

29

Simulating the Echelon Release Project

Histogram

30

Simulating the Echelon Release Project

Parameter Estimate Comparison
PERT

Monte Carlo
Simulation

Mean

60.8

61.3

Standard
Deviation

3.4

3.8

31

Simulating the Echelon Release Project

Project Duration
Total Time until
Project is Due

PERT Likelihood
of Finishing on
Time

Monte Carlo
Likelihood of
Finishing on Time

61

50%

50%

62

60%

59%

63

70%

68%

64

80%

75%

65

90%

82%

69

99%

97%

PERT underestimates
the project duration,
since the method ignores
that critical paths can
change!

32

The Path-Changing Issue

Project A

Project B

Task
Task

Task
Task

Task

Task
Task

Task
Task

Task
Task

Task
Task

Task

In which project would you be more distrustful of PERT estimates?

33

Simulating the Echelon Release Project

Likelihood of Being Critical (Criticality)
Task

Likelihood of
Being Critical

A
B
C
D
E

100%
80%
80%
80%
20%

F
G
H

20%
20%
100%

I
J
K
L
M
N

100%
0%
0%
0%
0%
100%

These estimates give you

a good idea which tasks
are critical and require
more intense monitoring
and control

34

Simulating the Echelon Release Project

Contribution to Variance in Project Duration (Cruciality)
Task

Contribution

A
B
C
D
E

1.1%
0.5%
2.9%
3.3%
2.1%

F
G
H

0.8%
0.5%
3.7%

I
J
K
L
M
N

84.9%
0%
0%
0%
0%
0%

These estimates give

you a good idea which
tasks drive uncertainty
in project duration,
and therefore where to
target risk reduction
efforts

35

Task Correlations
High, positive correlation

No correlation

High, negative correlation

Estimates were made by same person

Problems from one task transfer to the
next
Same resources work on multiple tasks

Tasks are independent and their

forecasts were not prepared by the
same person

Task boundaries are not well defined

Team members will try to pre-empt
other peoples work

36

Variance and Correlations

Two Independent Random Variables
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

1 = 10, 1 = 1

1 2 10 10 20
12 22 2 1.41

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

2 = 10, 2 = 1

= 20, = 1.41

37

Variance and Correlations

Two Correlated Random Variables
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

1 = 10, 1 = 1

1 2 10 10 20
2 12 22 2 12
2 12 1

1 2 1

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

= 0.5

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

2 = 10, 2 = 1

= 20, = 1.73

3 1.73
38

Variance and Correlations

Two Correlated Random Variables

Summing independent random variables

reduces the standard deviation, since
summing always means that high and low
values cancel out
As the correlation between random variables
increases, so does the standard deviation of
their sum, since a higher correlation implies
less canceling out of high and low values
39

A Note on Correlation Matrices

Suppose that the correlation between A and B is
0.9, and the correlation between B and C is 0.9.
Could A and C be uncorrelated?
You can easily end up with inconsistent
correlation matrices. Crystal Ball will fix them
for you by altering your correlations to be as
close as possible to a valid correlation matrix.
40

Simulating the Echelon Release Project

Project Duration
PERT Likelihood

Monte Carlo
Likelihood

Monte Carlo
Likelihood with
Correlations

61

50%

50%

52%

62

60%

59%

58%

63

70%

68%

64%

64

80%

75%

69%

65

90%

82%

74%

69

99%

97%

88%

Total Time until

Project is Due

Ignoring
correlations
between task
durations also
underestimates the
project duration

41

PERT or Monte Carlo?

PERT analysis is easy to carry out and
understand
Available in MS Project
Can be easily done in Excel

Monte Carlo simulations can be more

accurate and allow more modeling flexibility
Requires specialized software
Requires some spreadsheet development
42

Key Take-Aways
Uncertainty
Simple variations in key project parameters can be
easily incorporated into planning

PERT Analysis
Simple and reasonably effective

Monte Carlo Simulations

Sophisticated and flexible
43