Business Commons^™

Discretization, Simulation, And Swanson’S (Inaccurate) Mean, J. Eric Bickel

Eric Bickel

Swanson’s Mean (SM) is heavily used within the oil and gas industry to approximate continuous probability distributions such as the lognormal. 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 simulation. We demonstrate that the best discretization methods have an accuracy equivalent to that of tens of thousands of Monte Carlo trials.