Monte Carlo simulation

Advanced Probability: Uncertainty in Data

Maarten Van den Broeck

Senior Content Developer at DataCamp

What is Monte Carlo simulation?

Weather forecast

Advanced Probability: Uncertainty in Data

What is Monte Carlo simulation?

  • Try out many random possibilities to see what could happen
  • Results in a probability distribution of all simulated outcomes
  • Example applications:
    • Financial forecasting
    • Risk assessment
    • Supply chain optimization

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Advanced Probability: Uncertainty in Data

Steps in Monte Carlo simulation

Step 1 of Monte Carlo simulation

Advanced Probability: Uncertainty in Data

Steps in Monte Carlo simulation

Steps 1 and 2 of Monte Carlo simulation

Advanced Probability: Uncertainty in Data

Steps in Monte Carlo simulation

Steps 1, 2, and 3 of Monte Carlo simulation

Advanced Probability: Uncertainty in Data

Example: project cost estimation

A company wants to estimate total cost of a project

  1. Key variables: material prices, labor hours, unexpected expenses

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Advanced Probability: Uncertainty in Data

Example: project cost estimation

A company wants to estimate total cost of a project

  1. Key variables: material prices, labor hours, unexpected expenses
  2. Run 10,000 simulations with randomly sampled values
  3. Analyze the results to estimate the probability of staying within budget

Example Monte carlo output

Advanced Probability: Uncertainty in Data

Key advantages of Monte Carlo simulation

  • Generates a range of possible outcomes
  • Quantify risks and opportunities in terms of probabilities
  • Capture complexity and interdependencies of variables

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Advanced Probability: Uncertainty in Data

Limitations of Monte Carlo simulation

  • Accuracy depends on the quality of the input data and assumptions
  • Computationally intensive
  • Expertise needed to interpret the results

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Advanced Probability: Uncertainty in Data

Example: project cost estimation

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Advanced Probability: Uncertainty in Data

Let's practice!

Advanced Probability: Uncertainty in Data

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