Monte Carlo Simulation (MCS)

This is a kind of experimental statistics. In other branches of science,

for example physics, the relationship between theory and
experiment can be depicted in this way:

Equipment,
Observation

Experimental
Physics

Theoretical
Physics

In statistics, theory developed from simple observations in card and dice games
in the 17th century and later. The fully-fledged experimental approach, now known as
Monte Carlo and thus acknowledging the origins of statistics in gambling, had to
await the development of fast personal computers and random-number generators:

Gambling:
Cards, Dice
Then

Experimental
Statistics

Very recent
Fast PCs

Randomnumber
generators

Theoretical
Statistics

MonteCarlo
methods
1

Example of use of Monte Carlo:

Sample of n measurements: x , x , x , .. x
1 2 3
n
Unbiased

with mean x

estimate of population variance is calculated as:

2

(x - x) + (x - x) + (x - x) +. + (x - x)
1
2
3
n

(n 1)
The sum of squares is divided by (n 1).
If divided by n, the estimate would be biased too low.
How can this be shown using Monte Carlo?

Use Gaussian (normal) random-number generator to generate

(say) 100 000 numbers with mean 0 and standard deviation 1
(variance 1).
Divide up these 100 000 numbers into 25 000 samples of
4 each (so n = sample size = 4).
For each sample of 4, calculate the mean and unbiased variance
using the formula with the correct (n 1) = (4 1) = 3.
Calculate and print out the average of these 25 000 means
and 25 000 variances.
For each sample of 4, repeat the calculation dividing the sum
of squares by 4 instead of 3.
Calculate and print out the average of these 25 000 variances.
Next slide shows results of an actual Monte Carlo.

100 000 random numbers generated with Gaussian distribution

and mean 0, standard deviation 1 (variance 1).

Average of means of 25 000 samples of 4 each: 0.000184

Correct value: 0
Average of variances of 25 000 samples of 4 each (using correct divisor
n 1 = 4 1 = 3): 0.999975
Average of variances of 25 000 samples of 4 each (using incorrect divisor
n = 4): 0.749979
Correct value: 1
so divisor n 1 = 3 gives a much closer estimate of the
population variance.

100 000 random numbers generated with uniform distribution

between 0 and 1. Mean: 0.5, variance 1/12 = 0.083333.

Average of means of 25 000 samples of 4 each: 0.499897

Correct value: 0.5
Average of variances of 25 000 samples of 4 each (using correct divisor
n 1 = 4 1 = 3): 0.083860
Average of variances of 25 000 samples of 4 each (using incorrect divisor
n = 4): 0.062895
Correct value: 1/12 = 0.083333.
so divisor n 1 = 3 gives a closer estimate of the
population variance (but not as close as in the Gaussian case).