Quantitative Project Risk Analysis in Excel Lesson 04

We saw in the previous lesson why heat maps or risk matrices are a very poor tool to assess the risks of a project. The obvious alternative to a qualitative risk analysis, then, is a quantitative risk analysis.
Some think that sophisticated software and advanced statistical knowledge are required to successfully perform a quantitative risk analysis of a project. We are going to demonstrate in this video that doing this is not complicated at all and that it can be done completely with just Excel.
The most popular tool for doing quantitative risk analysis is called a Monte Carlo simulation. We are going to explain this tool with an example in Excel.
The heart of Monte Carlo simulation is the ability to generate random numbers. In plain English, a random number is one that is generated by a process that cannot be reasonably predicted. Excel has a function that does this. It is the RAND() function. It is a volatile function. That is, each time Excel is recalculated, a random number between 0 and 1 will be generated. Notice how each time F9 is recalculated or keyed in, a new random number is generated that is impossible to predict in advance. Each of the numbers generated has exactly the same probability of occurrence.