You don’t need to worry about which distribution to use any more RISK-ACADEMY Blog

Let’s face it – one of the biggest excuses risk managers use to avoid quantitative analysis is the paralysis that comes from choosing the “right” probability distribution. The selection options in ModelRisk can make your head spin:

Overwhelming, right? And that’s just one tool. The @RISK plugin also has over 90 distribution functions! It’s like being a kid in a candy store, except instead of joy, you’re overwhelmed by lognormal, Weibull, Gamma, and other exotic-sounding options. The result? Analysis paralysis and a retreat to the comfort zone of qualitative assessments.

But what if I told you there’s a way to sidestep this entire problem? Enter flexible distributions – the risk manager’s new best friend. Flexible distributions allow you to input as many percentiles (quantiles) as you want, and the magic happens automatically. The distribution molds itself to fit your data points. No more agonizing over whether you should use a gamma or a lognormal distribution. You simply input what you know, and the flexible distribution does the heavy lifting. You can input as many or as little data points as you have. 

And the best part? There’s a web tool that makes this process incredibly simple and intuitive. Enter MakeDistribution:

You can literally drag and drop your quantiles. It’s so user-friendly, you might actually enjoy creating distributions (I know, I am a nerd). MakeDistribution is free to try for as long as you want, but once you want to export your distributions, it does come with a price tag – $990/year. But consider what you’re getting: A tool that eliminates the biggest roadblock to quantitative analysis – the fear of getting it wrong. Plus, it exports in one click to SIPmath, @RISK, ModelRisk, Analytic Solver, and lets you download samples as CSV. You can use the distributions in free ChanceCalc from probabilitymanagement.org or in any other risk management software. 

Or, if you have a temporary need for a high-stakes project, you can subscribe on a monthly basis for just $99/month. Once you’ve exported your distributions, they’re yours forever.

Now, I’m not saying traditional distributions are obsolete. If you’ve got strong theoretical reasons for using a specific family (like using normal distribution for variables that are sums of many small independent contributions), by all means, go for it. But for most of us dealing with the messy realities of risk management, flexible distributions are a breath of fresh air.

Here’s my challenge to you: Take that risk assessment you’ve been putting off because you couldn’t decide on the “right” distribution. Use a flexible distribution instead. Input your best estimates for the 10th, 50th, and 90th percentiles. See how easy it is. No more excuses about not knowing which distribution to choose. Remember, in risk management, the goal isn’t mathematical perfection – it’s making better decisions with the information we have. Flexible distributions give us a powerful tool to do just that, without getting bogged down in distribution selection paralysis.

So, are you ready to embrace flexible distributions and take your quantitative risk analysis to the next level? Or are you going to stick with qualitative assessments and pretend uncertainty doesn’t exist? The choice is yours, but I know which path leads to better risk-based decision making.

Let’s make 2024 the year we finally put the “distribution selection” excuse to rest. 

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