SPE Economics & Management
Volume 3, Number 3, July 2011, pp. 128-140

SPE-148542-PA

Discretization, Simulation, and Swanson's (Inaccurate) Mean

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DOI  More information 10.2118/148542-PA http://dx.doi.org/10.2118/148542-PA

Citation

  • Bickel, J.E., Lake, L.W., and Lehman, J. 2011. Discretization, Simulation, and Swanson’s (Inaccurate) Mean. SPE Econ & Mgmt  3 (3): 128-140. SPE-148542-PA. http://dx.doi.org/10.2118/148542-PA.

Discipline Categories

  • 3.2.1 Risk, Uncertainty, and Risk Assessment
  • 3.1.2 Economic Analysis Guidelines
  • 3.1.7 Project Economics/Valuation
  • 3.2.4 Decision-Making Processes
  • 6.7.4 Probabilistic Methods
  • 6.7.5 Economic Evaluations
  • 3.4 Professionalism, Training, and Education

Keywords

  • Swanson's rule, 30-40-30 rule, discrete approximations, Monte Carlo simulation, decision analysis

Summary

Swanson's mean (SM) is heavily used within the oil and gas industry to approximate continuous probability distributions such as the log-normal. In this paper, we document the errors induced by this practice, which, as we show, has no theoretical justification for any distribution other than the normal. In parallel, we review methods to discretize continuous distributions and compare these methods to Monte Carlo (MC) simulation. We demonstrate that the best discretization methods have an accuracy equivalent to that of tens of thousands of MC trials.

© 2011. Society of Petroleum Engineers

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History

  • Original manuscript received: 6 October 2010
  • Revised manuscript received: 4 February 2011
  • Manuscript approved: 16 March 2011
  • Version of record: 15 July 2011