Monte Carlo simulation

What is monte Carlo simulation

Monte Carlo simulation is one of the most common application across many fields.

In finance, Monte Carlo is used to simulate a number of future financial situation such that the decision makers can have some of throughout views of the future.

Monte Carlo is useful because it could produce the estimation for uncertain situation that involves with random variables.

Unlike other method of machine learning, Monte Carlo does not produce a specific prediction of the context. Otherwise, it produces all possible outcome of the situation then plot all of them in a chart as the common approach.

Monte Carlo works by repeating assign specifics values to random variables to have a particular outcome. Each assignment of variables leads to one outcome and reapeatedly, the simulation can cover a set of possible outcomes.

What-if analysis?

By changing parameters of the simulation, it can create whole new universe of outcomes. The developers can change each variables by one to see the impact of each parameters on the result.

Density probability

Density proabability plot is the most popular one for Monte Carlo simulation.

Depends on the problem, the result can be plotted in different plots. Confidence interval, pdf, cdf, …