Monte Carlo Simulation Presentation
Monte Carlo Simulation Presentation
Monte Carlo Simulation Presentation
Job 1 5 months
Job 2 4 months
Job 3 5 months
Total 14 months
Table 1 Explanation
• In the simplest case, we create a single estimate for each of
the three parts of the project. This model gives us a result
for the total time: 14 months. But this value is based on
three estimates, each of which is an unknown value. It
might be a good estimate, but this model can't tell us
anything about risk. How likely is it that the project will be
completed on time?
• To create a model we can use in a Monte Carlo simulation,
we create three estimates for each part of the project. For
each task, we estimate the minimum and maximum
expected time (based on our experience, or expertise, or
historical information). We use these with the “most likely”
estimate, the one that we used above:
Table 2:Forecasting model using
estimate range
Job Minimum Most Likely Maximum
Job 1 4 Months 5 Months 7 Months
Job2 3 Months 4 Months 6 Months
Job3 4 Months 5 Months 6 Months
Total 11 Months 14 Months 19 Months
Table 2: Explanation
• This model contains a bit more information. Now there is a
range of possible outcomes. The project might be
completed in as little as 11 months, or as long as 19
months.
• In the Monte Carlo simulation, we will randomly generate
values for each of the tasks, then calculate the total time to
completion1. The simulation will be run 500 times. Based
on the results of the simulation, we will be able to describe
some of the characteristics of the risk in the model.
• To test the likelihood of a particular result, we count how
many times the model returned that result in the
simulation. In this case, we want to know how many times
the result was less than or equal to a particular number of
months
Table 3: Results of a Monte Carlo
Simulation
Time No of times(out of 500) Percent of total(Rounded)
12 Months 1 0%
13 Months 31 6%
14 Months 171 34%
15 Months 394 79%
16 Months 482 96%
17 Months 499 100%
18 Months 500 100%
Table 3: Explanation
• The original estimate for the “most likely”, or expected case, was 14
months. From the Monte Carlo simulation, however, we can see
that out of 500 trials using random values, the total time was 14
months or less in only 34% of the cases.
• Put another way, in the simulation there is only a 34% chance about
1 out of 3 that any individual trial will result in a total time of 14
months or less. On the other hand, there is a 79% chance that the
project will be completed within 15 months. Further, the model
demonstrates that it is extremely unlikely, in the simulation, that we
will ever fall at the absolute minimum or maximum total values.
• This demonstrates the risk in the model. Based on this information,
we might make different choices when planning the project. In
construction, for example, this information might have an impact
on our financing, insurance, permits, and hiring needs. Having
more information about risk at the beginning means we can make a
better plan for going forward.
Types of Monte Carlo Models
• Simple Monte Carlo
• Two Stages- Monte Carlo
• Mixture Modeling Monte Carlo
• Markov Chain Monte Carlo
Applications of Monte Carlo Methods
• Expanding the possible scenarios
• Sensitivity Testing
• Reduce Complexity
Advantages of Monte Carlo
• Provides us with a range of scenarios that is
hard for the human mind to replicate
• Allows to easily incorporate conditional
changes to a systems
• Permits the Comprehensive measurement of
complex systems
Disadvantages of Monte Carlo
Methods
• Scenarios are hard to justify and
communicate, especially to those without a
quantitative mindset
• Does not address advantages of using
conditional analysis
• Only as credible as the model being simulated
Key Lesson for Decision Makers
• Do not trust Monte Carlo methods blindly
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