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So now that we've had a look and
we understand what a quantitative model is

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about let me tell you some of the specific
activities where these models are used.

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So one thing that we can do once we've
got a quantitative model is prediction.

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And prediction is
basically taking the model,

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putting in an input, and
calculating the output.

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And so going back to the diamonds ring
example, what I mean by prediction.

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What's the expected price of a diamond
ring that weighs 0.2 of a carats?

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If I got a model,
I can create that prediction.

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And certainly one of the most
often used places for

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these quantitative models is what
we call predictive analytics.

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And so
if you want to do predictive analytics,

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you need some underlying model for
the process, typically.

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Another place that we use these
models is in forecasting.

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And when I'm talking about forecasting
I'm really thinking about a time series.

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And I'm thinking about trying to make
a comment about what's happening

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in the future.

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And so forecasting is an activity
that most businesses and

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entities go through at some stage,
often to do with resource planning.

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And going back to the example of the
epidemic if one was involved in a public

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health situation, a key question that
you would be asking, for example,

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would be how many people are expected
to be infected in six weeks time.

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Because that, the answer to that sort of
question is going to help me in terms of

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resource planning.

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Here's another forecasting type problem
where quantitative models can be very,

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very useful.

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So imagine that you're running a hospital.

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And you are trying to schedule
patients for appointments.

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One of the truths of the matter here
is that not everybody shows up for

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their appointment.

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And that leads to
inefficiencies in the system.

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The system could be improved if we had
a sense of who was likely to not show up.

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And perhaps we could tweak
the schedule as a result of that.

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And so that would be another example where
we would like to do some forecasting,

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forecasting whether or not someone's
likely to show up for an appointment.

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Another activity that we use these
quantitative models for is optimization.

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And so optimization takes up
a lot of business thinking.
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And the example that I've got
here is the demand and price.

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And so
It's a very legitimate question to ask.

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I wonder what price is
going to maximize the profit?

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And the key word there is maximize,
that's to optimize an output, the profit.

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And optimization activities are going to

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typically require an underlying
quantitative model.

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And so that's one of the places where
quantitative models go to work as inputs

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for optimization, trying to make
your business as good as it can be,

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optimizing price,
optimizing the supply chain etc.

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So we use models for optimization.

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Another activity that we go through and
models help us are ranking and targeting.

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And so what I mean there is that
we're often looking at a list.

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It might be customers or
it might be diamonds, for example.

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And we'd like to have a look at these
diamonds, perhaps, and figure out which

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ones we'd be interested in purchasing if
we're a diamond merchant, for example.

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And so I can't look at all the diamonds
that are out there in the world

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because I simply don't have the resources.

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And so that's the idea of
given limited resources.

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It would be really nice if I could
identify potential targets of opportunity.

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And that essentially is a ranking and
targeting exercise.

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And if we have a model we can
create a set of predictions.

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We can sort those predictions and
that creates a ranking.

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And then we can work our way down that
list of predictions in order there,

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that rank list,
in order to optimize our own time.

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And so another example would be
that I'm interested in real estate.

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And I'm considering
potential properties to buy.

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There are millions of
properties potentially for

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sale in the country at
any one point in time.

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I don't have an opportunity
to look at all of them.

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Be nice if I could create a model
that would help me identify those

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properties that seem the,
are of the most interest to me.

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And that's something that
a model can help you do.

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Here are some more things that we
can use our quantitative models for.

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What-if scenarios, scenario planning,
we will often like to

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understand what might happen to
the world if certain things change.

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And so going back to the epidemic we might
want to ask ourselves the question well,
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what if the growth rate changed and
increased to 20% per week?

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Then how may infections are we
going to expect in the next ten weeks?

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So if we have a model,
we are able to examine

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the consequences of the change
of some of our assumptions.

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And that's the idea of scenario
planning and what-if analysis.

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So that's something else that
a model can help you do.

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Certain models lend
themselves to interpretation.

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And in terms of the price and
quantity demanded model,

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there was a coefficient In the equation,
if you look back.

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And that coefficient was the power,
which was -2.5.

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So it's a number, but sometimes these
coefficients have interpretations.

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And that interpretation can be helpful.
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And turns out that
the interpretation of that -2.5 is

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what's known as an elasticity.

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And it tells us that as
the price goes up by 1%,

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we can anticipate
the demand to fall by 2.5%.

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And so that's what I mean by
interpreting a coefficient in a model.

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And that can give us
additional insight and

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help us explain the model to other people.

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So our models involve
mathematical equations.

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The mathematical equations often
have coefficients in them.

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The coefficients can have real
meanings and interpretations.

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Another task that models are used for
is to conduct a sensitivity analysis.

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And so I pointed out earlier on that

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pretty much every model you create is
going to rely on some assumptions.

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And a sensitivity analysis
is a process where we look

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to see how sensitive the outputs of the
model are to some of those assumptions.

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And if we find that the model that's
particularly sensitive to an assumption,

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then that tells us that we need to
think a little more carefully about

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that assumption.

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Maybe we'll try and confirm that
the assumption is realistic or

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collect more information to try and
tie that assumption down more precisely.

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So there's a sensitivity
analysis typically with a model

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that helps us figure out which of
the assumptions are really important and

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which aren't so important, and therefore
how we might want to use our time in

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confirming that the underlying
assumptions are reasonable.

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After having gone through
this whole modeling business,

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hopefully there are some benefits.

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And here I've listed
out a set of benefits.

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They're undoubtedly more
than up here on this slide.

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But these are benefits that I think and
have experienced myself,

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after having gone through
this modeling activity.

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So one of the things that can
be the outcome of a model is

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the identification that there's some
gaps in the current understanding.

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You've tried to lay out your
understanding of the business process.

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And theres just some big gap
sitting there in the middle.

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And that's only become apparent because
you've taken the time to lay out

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your current understanding.

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So identifying gaps is
certainly a benefit.

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It's often the case that
people are using models

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without having made underlying
assumptions explicit.

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And so one of the benefits of
creating a useful model is that

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you will have explicated
what those assumptions are.

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So they're on the table,
everybody can see what you're assuming

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as you come up with your
recommendations from that model.

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And sometimes those assumptions
have been implicitly foreign.

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Not everyone is aware of them.

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And so explicating the assumptions
can be very useful.

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You will also have at the end of
the modeling process a well-defined

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description of the business process,
how the pieces fit together.

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And that can be of benefit its own right.
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Fourth one I've got here
isn't entirely obvious.

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But one of the things
a model can do is create what

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I call an institutional memory.

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So, many businesses will have some
smart person who is relied on for

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doing certain things,
certain forecasting activities.

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What do you think we're
going to sell next month?

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They're someone who's worked for
the company 25 years.

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You go to them,
they have a good sense of what's going on.

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But what happens if that person leaves?

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Knowledge goes with them.

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And so you can think of a model as
creating an institutional memory.

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Because that model is going to be a set of
equations, a set of inputs and outputs.

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And that's going to stick
around beyond any individual.

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And so I think models can be
useful from that point of view.

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Ultimately, the model is going to
be used as a decision support tool.

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And I've bolded the word
support here because

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it's a little naive to think that
the model is going to reveal truth.

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They're always approximations.

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And the model is typically going to
be used as one of a suite of

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tools to help support the decision
making within a company.

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And so it's very much not
an end in its own right but

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a support to other activities.

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My final comment here is that sometimes

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I think that models are serendipitous
insight generators.

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By going through the modeling process
you learn something that you hadn't

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thought about at all,
something very unexpected.

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And that happens quite often.

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And so that's another benefit of modeling.