Part 2. MM4XL Tools > 1. Strategic Tools > Risk Analyst > 2. Simulation Never heard of it > Monte Carlo method

Risk Analyst

Monte Carlo method

The Monte Carlo technique is used to create artificial representations of real-life issues, such as a new product launch, the time to failure of a machine, or the probability of drilling an oil deposit. Monte Carlo uses samples of random numbers from known populations. The concept behind the technique is that by drawing many samples we can assess the behavior of the variable we are interested in.

Monte Carlo analysis done with the Risk Analyst tool of MM4XL software follows a 4-step procedure:

  1. Modeling. Specification of the distribution to draw samples from.
  2. Sampling. Definition of how many trials to sample.
  3. Storing. Storage of samples of random numbers.
  4. Summarizing. Construction of relative frequency histogram of the sample data.

The process is relatively easy. The tough part of the job is selecting appropriate distributions, setting accurate parameters, and interpreting the results. This help chapter is intended to help you quickly get up to speed with risk modeling.

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