Decision Economics · Module E5
Risk, Uncertainty and Economic Modelling
Probabilistic economics without false precision: risk versus uncertainty, input distributions and correlations for Monte Carlo, reading the NPV distribution and its P10, P50, P90 and mean, decision trees and expected monetary value, Spearman driver ranking, and value of information.
- Level
- Intermediate
- Position
- Module 5 of 8
- Video
- About 19 minutes, narrated
- Format
- Narrated video lesson and slide reading view; with the certified option, a quiz whose pass unlocks the next module.
What the module covers
- Risk versus uncertainty
- Input distributions and correlation between inputs
- Reading the NPV distribution: percentiles and the mean
- Decision trees and expected monetary value
- Rank-correlation driver ranking
- Common Monte Carlo mistakes in upstream analysis
Learning outcomes
After the module you should be able to:
- Model economic uncertainty without overstating precision.
- Build a Monte Carlo economic model with sensible distributions
- Read and explain an NPV distribution
- Separate discrete risks from continuous uncertainty
A short preview
Risk and uncertainty are different things. Risk is a discrete event that may or may not happen, such as a dry hole, and it belongs in a decision tree with a probability. Uncertainty is the range of outcomes if the event goes your way, the spread of volumes or costs, and it belongs in a Monte Carlo. Folding a 30 percent chance of success into a continuous volume distribution produces a distribution that describes no outcome that can actually occur.
Who it is for
Petrophysicists, geoscientists and reservoir engineers who need to connect technical work to investment decisions, and analysts new to upstream economics.
Prerequisites: None required; familiarity with volumetric estimates helps.
Take the module in the Learning Hub
Decision Economics: Eight economics modules from NPV framing through portfolio ranking and capstone. The lesson opens in the Learning Hub once the track is purchased; graded quizzes and the certificate come with the certified option.