Why You Need Monte Carlo Simulation

by J John Swanko

(People Port) Firms have credited Monte Carlo analysis (MCa) with helping navigate this Great Recession.  Some firms have never heard of Monte Carlo.  Others, do not know why they may need it

Monte Carlo analysis simulates a series of possible future events and those events impact.  Today it is used in everything from finding the right lighting to estimating a number for our Security and Exchange Commission.  I first used it to find the impact of expected changes in rules governing pesticides.

MCa or MCs (Monte Carlo simulation) is often depicted as spinning a roulette wheel.  The number and color the ball picks is a possible answer.  With today's spreadsheets, databases almost any future event is projected.  Information is aggregated and the most probable, given the current conditions and expected future events, is used in a firm's planning.

Most interactive games today use some type of random generated events, from chess to gun battles, simulating real life.  MCa has been used to write books, build flesh on its characters. 

The resulting list or map is serious help to any firm that worries about competition.  Today a spreadsheet program may be designed for MCa only.  There are every type of shell programs imaginable.  These allow the user to build repetitive keystrokes into spreadsheets, databases, if yours does not allow that use.  Creating a list of choice events or answers is time consuming work and many firms do not see the need, because the eventual answer is only as good as those assumed in the beginning.

As most have guessed, the Random Variable, and the If Then (Else) statements become incredibly important.  Think back to Enron, Lehman folding...  all events were thought -impossibles.  Not impossible today.  The information MCa generates for a firm is very important.  So important, that a firms competitors would love having a peek.  Just allowing your financials to vary yields real tools that help any firm survive. 

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Photos: Crestock

J John Swanko wrote Decision Support Applications For/In Business Planninga copyrighted text before business method patents were allowed.  The short book, depends heavily on Monte Carlo simulation for analysis.

Copyrighted, 2012, J John Swanko, All rights reserved. This work is licensed under a Creative Commons Attribution 3.0 Unported, It may not be published, broadcast, redistributed, rewritten, without meeting the terms and conditions.



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