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As the name suggests, it seems exciting to know what Monte Carlo simulation is.
The term Monte Carlo simulation has its charisma, it sounds complicated. But in
reality, it’s not complicated as we think. Let’s see if we can nail down the entire
process in straightforward terms.
Monte Carlo enables the decision-maker with a range of possible outputs and the
probabilities that will occur for any choice of action.
The technique was first used by scientists working on the atom bomb and thus
named as Monte Carlo, the Monaco resort town famous for its casinos. The
simulation has also been used to model diversified physical and conceptual
systems.
Let’s take an example here, let’s say you have coins put on a table. You count tails
and heads and come up with a ratio that you plot on a graph. You then perform
the same experiment 1000 times to see what the results and the chart look like.
The entire process is Monte Carlo method. Now, if you programmed a computer
to model the same process and ran the model 1000 times or more, the end
graphing you get is termed as Monte Carlo simulation.
Probabilistic Results: In this, the result not only shows what could happen
but how likely each outcome is to occur.
Graphical Results: With the data generated by Monte Carlo simulation, it is
facile to create graphs of different outcomes. Their chances of occurrence
become significant for communicating findings to the other involved
stakeholders.
Sensitivity Analysis: In the Monte Carlo simulation, it is easy to see which
inputs have the most significant effect on bottom-line results.
Scenario Analysis: Using Monte Carlo simulation, the analysts can exactly
see which inputs had what values together when a particular outcome
occurs.