Econometric analysis for project risk management?

Econometric analysis for project risk management?

I’m reading an excellent book titled “Introductory Econometrics: Using Monte Carlo Simulation with Microsoft Excel” by Humberto Barreto and Frank Howland which is on the use of econometric (applied mathematics for economics) analysis with a focus on regression and Monte Carlo simulation.

The biggest value of the book is in the way the statistical concepts are introduced then implemented using Microsoft Excel.  The authors build on the intuition of the reader using practical examples, by explaining all the concepts.  More importantly, they utilize Monte Carlo simulations throughout to visualize them.

Simulations are typically used as a tool for forecasting multiple parameters, but by invoking the reader’s intuition and using Excel to visualize the stochastic variables, their distributions, the role of chance in statistical inference, hypothesis testing etc., the reader simultaneously learns about the theory and sees its practical application in real time.  The examples in the book are not just made up illustrations, but are meant to open reader’s eyes to some unexpected or counter-intuitive ideas, that are difficult to capture just by studying the theory.

But most importantly for me as a project management educator and practitioner, is that it gave me the best explanation of the mathematical foundations of the Monte Carlo method and a way to build out a model that I can do experiments with using Excel.  As anyone who is familiar with project management theory and practices, Monte Carlo is thought of as a very rigorous way to quantify risk scenarios for a project schedule and cost baselines.  Unlike PERT, this technique accounts for the multiple range of possible answers and the probability that each outcome will occur.  This topic is often covered in a very shallow and perfunctory manner in PMP prep courses, but is a very important technique to understand.

On that note, I think too many professionals including of course project managers, are too preoccupied with getting certifications and should be looking to integrate diverse disciplines with their study and practices in a more interdisciplinary way and coming up with sophisticated tools to solve real pressing problems.

P.S. – For those who want an excellent introduction to the Monte Carlo method for project risk, read my fellow PM blogger Shim Marom’s excellent introductory post on it.

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