Oracle Crystal Ball using Monte Carlo Simulations
Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty in prediction and forecasting models.
Monte Carlo simulation can be used to tackle a range of problems in virtually every field such as finance, engineering, supply chain, and science.
Monte Carlo simulation is also referred to as probability simulation.
BREAKING DOWN ‘Monte Carlo Simulation’
When faced with significant uncertainty in the process of making a forecast or estimation, rather than just replacing the uncertain variable with a single average number, the Monte Carlo Simulation might prove to be a better solution. Since business and finance are plagued by random variables, Monte Carlo simulations have a vast array of potential applications in these fields. They are used to estimate the probability of cost overruns in large projects and the likelihood that an asset price will move in a certain way. Telecoms use them to assess network performance in different scenarios, helping them to optimize the network. Analysts use them to assess the risk that an entity will default and to analyze derivatives such as options. Insurers and oil well drillers also use them. Monte Carlo simulations have countless applications outside of business and finance, such as in meteorology, astronomy and particle physics.
Monte Carlo simulations are named after the gambling hot spot in Monaco, since chance and random outcomes are central to the