When Parametric Sensitivity Analysis Isn't Enough

Abstract

This article addresses the issue of structural vs. parametric sensitivity analysis in three parts. The first part, intended for instructors, offers some conjectures about why structural sensitivity analysis is relatively neglected. It is intended to stimulate debate about the way sensitivity analysis is taught. The second gives an example from a real and interesting decision domain (drug legalization) in which structural uncertainty swamps parametric uncertainty. I have presented some variation of this example in a variety of graduate courses, both OR related and not, as well as to drug policy makers and researchers. I have not used it as a formal case but believe it could be taught in that format and two variants of the case questions are given in the third part. Elementary microeconomics would be a prerequisite to using the material in case format.