Monte-Carlo Simulations:

This technique tries to model and study the behavior of systems

by including the randomness of the processes involved in the
system. It is one of the most powerful techniques used in the
simulation and modeling of stochastic systems. Here, we do not
make any assumptions about the models, instead we describe the
behavior as complete as we can and follow the items contributing
to the process.

Monte Carlo simulation is a type of simulation that relies on

repeated random sampling and statistical analysis to compute the
results. This method of simulation is very closely related to
random experiments, experiments for which the specific result is
not known in advance. In this context, Monte Carlo simulation can
be considered as a methodical way of doing so-called what-if
analysis. We will emphasis this view throughout this tutorial, as
this is one of the easiest ways to grasp the basics of Monte Carlo
simulation.

We use mathematical models in natural sciences, social sciences,

and engineering disciplines to describe the interactions in a
system using mathematical expressions. These models typically
depend on a number of input parameters, which when processed
through the mathematical formulas in the model, results in one or
more outputs. A schematic diagram of the process is shown below

.
This model fits quite nicely in discrete or semi-discrete systems
where all or some of the variables are stochastic.

The input parameters for the models depend on various external

factors. Because of these factors, realistic models are subject to
risk from the systematic variation of the input parameters. A
deterministic model, which does not consider these variations, is
often termed as a base case, since the values of these input
parameters are their most likely values. An effective model should
take into consideration the risks associated with various input
parameters. In most circumstances, experimenters develop
several versions of a model, which can include the base case, the
best possible scenario, and the worst possible scenario for the
values of the input variables.

In Monte Carlo simulation, we identify a statistical distribution

which we can use as the source for each of the input parameters.
Then, we draw random samples from each distribution, which
then represent the values of the input variables. For each set of
input parameters, we get a set of output parameters. The value of
each output parameter is one particular outcome scenario in the
simulation run. We collect such output values from a number of
simulation runs. Finally, we perform statistical analysis on the
values of the output parameters, to make decisions about the
course of action (whatever it may be). We can use the sampling
statistics of the output parameters to characterize the output
variation.

Simulating a simple queue:

There are two random processes characterized by two
distribution functions:

Arrival process, time between events has the distribution fa(t).

Service process, service time has the a distribution fs(t).

TimeNow = 0
QSize = 0
ServerBusy = False
Read SimulationTime

NextArrivalTime = Random_fa ()
NextDepartureTime = SimulationTime+1

/* Loop until simulation time is exhausted */

While (TimeNow < SimulationTime) do
TimeNow = TimeNow + dt /*Advance the time */

/* Is it time for a new arrival? */

If (TimeNow ≥ NextArrivalTime)
 /* Push in the Q and generate a time for next arrival */
QSize = QSize+1
NextArrivalTime = TimeNow + Random_fa ()
EndIf

/* Is it time for job completion? */

If (ServerBusy == True) AND (NextDepartureTime ≥
TimeNow) then
/* Remove from the Q and release the server */
QSize = QSize - 1
ServerBusy = False
Endif

/* Check whether the server is idle and there is a job to be

served */
If (ServerBusy == False) AND (QSize > 0) then
/* Server is now busy. Select a time for job completion
*/
ServerBusy = True
NextDepartureTime = TimeNow + Random_fs ()
Endif
CollectQStatistics
Endwhile
ComputeDelaysAndStats
B

  p 
 A C
  p 2

  p 3 D

Suppose you want to simulate the above system. This will involve
the processing patterns at each centre together with the arrival
and departure processes. Let us look into the departure process
at A. Leaving A, the job could be placed at B, C or D with
probabilities p1, p2 & p3 respectively. To decide which centre may
be chosen we generate a random number (x) between 0..1, then
use the following simple algorithm

If (0 <= x <= p1) then place job in B

If (p1 < x <= p1+p2) then place job in C
If ( (p1+p2) <x<= 1) then place job in D

Note that p1+p2+p3 = 1.

Above models could be extended to simulate all the dynamics of

such systems in order to predict the performance when unusual
patterns are employed. The technique could also be deployed in
order to understand the dynamics of systems where the user can
vary the parameters in an effort to get the simulation results to
closely match the known behavior of the system.
Monte Carlo techniques are extensively used in a wide range of
engineering applications. In electronics, these techniques are used
to study and predict the characteristics of semic conductor
devices. These methods trace a large number of particles
(electrons and holes) for a long time and use averaging methods
to compute performance measures for the devices.

Note that the results you would obtain using any simulation
technique, Monte-Carlo included, will be as good as the model
you started with. In other words, bad models will produce bad
results.

Monte-Carlo methods are also extensively used by the financial

sector in order to understand the impact of risk and uncertainty in
financial, project management, cost, and other forecasting
models.