Sensitivity Analysis

Reviewed by Vineeth | Updated on Aug 27, 2020

Introduction

Sensitivity analysis obtains as to how different values of an unrestrained variable is going to impact certain restricted dependent variables under the given set of considerations. In simple word, sensitivity analysis is going to investigate how several sources of variability in a mathematical representation that contributes to the overall uncertainty in the representation. This method is made use of inside certain boundaries that are dependent on one or more inputs that may vary.

Sensitivity analysis is made use of in the world of business and also in economics. It is extensively used by economists and financial analysts. Sensitivity analysis is commonly referred to as what-if analysis.

Understanding Sensitivity Analysis

Sensitivity analysis can be considered as a financial model or representation which determines the way in which the target variables are impacted on the basis of variations in other related variables. These are called as input variables. This method is one of the ways of predicting the result of a decision when given a range of specific variables. On creating a provided with a set of variables, economists and financial analysts may be able to determine the way in which the changes in one variable is going to affect the final outcome.

Input and Target

Both input and target, regardless of them being dependent or independent, variables are completely analysed when there is sensitivity analysis, is being made. The individual doing the analysis will look at the way in which the variable would move and also the way in which the target is going to be affected by the input.

Sensitivity analysis will give provisions to make forecasting with the use of true historical data. By analysing all possible outcomes and variables, crucial decisions may be made that are pertinent to the economy, business, and investments.