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# Monte Carlo method

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The Monte Carlo method is a risk analysis technique that enables to evaluate all the possible outcomes of your certain decisions and assess the impact of risk.

Spreadsheet applications for personal computers granted a major opportunity to use Monte Carlo simulation in everyday analysis work.

Monte Carlo simulation is a computerized mathematical technique that allows to account for risk in quantitative analysis and decision making. This technique is used in many fields such as finance, project management, energy, manufacturing, engineering, insurance, oil & gas, and many other.

It was first used by scientists during World War II in connection with the development of nuclear weapons.

Monte Carlo method defines a probability distribution for each parameter of the predictive model that has inherent uncertainty.

The most commonly used probability distribution is the triangular one, because of its ease of application and accuracy for a wide number of cases. Other distribution curves are: normal (used typically for inflation rates and commodities prices), uniform and discrete.

During a Monte Carlo simulation, the calculation is made in thousands of iterations, each time using a different set of random values from the probability function.

Monte Carlo simulation is probably the best quantitative model to analyze different scenarios and to perform a sensitivity analysis, because of its probabilistic approach that enables to evaluate the likelihood of the analyzed events. Top