Monte Carlo Simulation

As you can see in my “About me” page, I´m currently doing my masters in Germany. One of the classes covers the topic of quantitative methods for decision making.

My group had the task to present the method of simulations, especially the Monte Carlo Simulation. This is a simulation method which was originally developed by the US army for the Manhattan project. Today it is used in many disciplines: physics, business and mathematics.

The goal of a Monte Carlo Simulation is to show probabilities for certain values or scenarios. For that it simulates thousands or millions of different scenarios and cumulates the values in charts and graphs, which you can analyze with statistical methods.

The attached presentation gives you an overview over the different kinds of simulations. After that it explains the Monte Carlo Simulations (MCS). The main part of the presentation is an example on how to utilize the MCS for risk management in a project. It is shown how you define risk rages and their distribution.

The main advantages of a MCS are:

  • It is standardized – and accepted as standard tool
  • You can use it for multidimensional risks
  • Higher awareness of the risks
  • Useful graphical output
  • You can apply statistical methods to it
  • It is usable with Mircrosoft Excel Add-Ins – no need to get in touch with new programs

The main disadvantages are:

  • The results of a MCS are very precise. However, their values are based on how you define the ranges and their distribution. I real-life it´s hard to know how risks behave and which impact they have.
  • The result of a MCS is based on a formula, which has to be developed first. These formulas can be very complex and hard to develop.
  • You always have to keep in mind that the results are from a model, and don´t have to be the equal to real-life scenarios.

Unfortunately, the whole presentation is in German. Feel free to post any questions – I will try to answer them! Hopefully it will be useful for someone!

Here you go: MonteCarloSimulation.pdf

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About sitweak
Monitoring, Network, Firewall, Mobile Security. I´m totally into that stuff!

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