Monte Carlo method (simulation)

Dmitry Khlestkin


The Monte Carlo method is intended to account for risk in quantitative analysis and decision making. This technique is used in various fields, such as finance, management, energy, manufacturing, engineering, insurance, transport, environmental protection and others.

Monte Carlo simulation does risk analysis by building models of possible results by substituting a range of values—a probability distribution—for any factor with inherent uncertainty. It then calculates results over and over again, each time using a different variety of random values from the probability functions.

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Depending upon the number of uncertainties and the ranges specified, a Monte Carlo method could involve up to tens of thousands of recalculations before it is completed. Monte Carlo method makes distributions of possible outcome values.

The meaning of the method is in the simulation of all possible realizations of the process, which is modeled by multiple repetition of the process.

For example, when building a supermarket, everything is considered: buyers, working desks, average purchase price and other parameters such as work schedule of cashiers or even a global plan of the building.

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