What is Monte Carlo Simulation?

What do we mean by " *Simulation*?"

		When we use the word *Simulation* , we refer to any analytical method meant to imitate a real-life system, especially when other analyses are too mathematically complex or too difficult to reproduce.

Without the aid of simulation, a spreadsheet model will only reveal a single outcome, generally the most likely or average scenario. What is required is a risk analysis method that uses both a spreadsheet model and simulation to automatically analyse the effect of varying inputs on outputs of the modelled system.

One type of spreadsheet simulation is Monte Carlo Simulation , which randomly generates values for uncertain variables over and over to simulate a model. Monte Carlo is used by all of the worlds most successful companies.

What happens during a Simulation?

A simulation calculates multiple scenarios of a model by repeatedly sampling values from the probability distributions for the uncertain variables and using those values for the cell. Simulations can consist of as many trials (or scenarios) as you want - hundreds or even thousands - in just a few seconds.

What are the benefits of risk analysis with simulation?

You stop guessing. While everyone must take risks to succeed, blind risks too often lead to costly errors. Simulation puts the odds in your favour by helping you choose the most promising calculated risks. Each time you perform a simulation, you gain a better understanding of the inherent risks.

You break free from the limitations of Excel spreadsheets.

The power of Monte Carlo simulation lies in the distributions of possible outcomes it creates. Monte Carlo simulation frees you from the constraints of estimates and best-guess values. Why rely on a single, possibly misleading estimate when you can easily create and analyse thousands of potential outcomes?

You have a competitive advantage.

With Monte Carlo analysis, you know what your competitor does not: the probability of a particular outcome. Because Simulation lets you quantify your risks, it can be a crucial tool for a successful negotiation.

You know what matters .

With Sensitivity Analysis you will know which factors really drive results. You can focus your energies on the right problem and complete the analysis sooner with less effort.

Impress Clients and Managers

Smart decisions alone aren't enough. You need to communicate your decisions. Predict's graphics and reports are the professional way to show your clients, and management that you have considered all the angles and made informed choices.

The need for Risk Analysis

You make decisions every day. Which vendor to use, what price to charge - the list is endless. You probably base your decisions on whatever data you have on hand - historical costs, competitors' prices, vendor estimates, etc. But how often do you have full, complete information ? Making the best decisions means performing risk analysis. And there's no easier, more powerful solution than Monte Carlo Simulation, the world's most widely used risk analysis tool.

Simulation shows You ALL possible outcomes

It lets you see all possible outcomes in your situation - and tells you how likely they are to occur. What this means for you -- the decision maker -- is that you finally have, if not perfect information, the most complete picture possible. You will see what could happen, how likely it is to happen, and therefore be able to judge accordingly which risks to take and which ones to avoid. While no software package can predict the future, Simulation can enable you to choose the best personal strategy based on the available information.

Project Management

Account for uncertainty in your Project Plans. Replace factors such as task duration, costs, and resources with distribution functions and run a simulation to see all possible project outcomes. Answer questions such as " What are the chances of this project finishing under budget and by the deadline?" What are the major risks to my project?