Monte Carlo Simulation

TAWANDA
MUSHIRI
History
What is Monte Carlo Analysis?

It is a tool for combining distributions, and thereby propagating more

than just summary statistics
It uses random number generation, rather than analytic calculations
It is increasingly popular due to high speed personal computers
Background/History

• “Monte Carlo” from the gambling town of the same

name
• First applied in 1947 to model diffusion of neutrons
through fissile materials
• Limited use because time consuming
• Much more common since late 80’s
Why Perform Monte Carlo Analysis?

• Combining distributions
• With more than two distributions, solving analytically is very difficult
• Simple calculations lose information
• 95% %ile ´ 95%ile ¹ 95%ile!
• Gets “worse” with 3 or more distributions
Monte Carlo Analysis

• Takes an equation
• example: Risk = probability ´ consequence
• Instead of simple numbers, draws randomly from defined
distributions
• Multiplies the two, stores the answer
• Repeats this over and over and over…
• Then the set of results is displayed as a new, combined distribution
What is Monte Carlo (MC) method ?

The Monte Carlo method :is a numerical method

for statistical simulation which utilizes sequences
of random numbers to perform the simulation
What is a Monte Carlo simulation?
•In a Monte Carlo simulation we attempt to follow
the `time dependence’ of a model for which
change, or growth, does not proceed in some
rigorously predefined fashion (e.g. according to
Newton’s equations of motion) but rather in a
stochastic manner which depends on a sequence of
random numbers which is generated during the
simulation.
Details of the Method

• Random Walk: Markov chain is a sequence of events with

the condition that the probability of each succeeding event
is uninfluenced by prior events
• Choosing from Probability Distribution: Any random variable
has a probability distribution for its occurrence. We need to
choose a random variable which mimics that probability
distribution
• Best way to relate random number to a random variable is to
use cumulative probability distribution and equating it to the
random nuber
 What the meaning of MC simulation?
●MC simulation is a versatile tool to analyse
and evaluate complex measurements
● Constructing a model of a system.
●Experimenting with the model to
draw inferences of the system’s behavior
 A simulation model

Inputs outputs
Measures of
Decision and
Simulation performance or
uncontrollable
model behaviour of the
variables
system
 A simulation model cont..
• Model inputs capture the environment of the problem
• The simulation model
– Conceptual model: set of assumptions that define
the system
– Computer code: the implementation of the
conceptual model
• Outputs describe the aspects of system behaviour that
we are interested in
 Random numbers

• Uniform Random numbers or pseudo-random numbers

(PRN) are essentially independent random variables
uniformly Distributed over the unit interval (0,1).

●The PRNs are good if they are uniformly distributed,

statistically independent and reproducible.
 Monte Carlo in PM
Predicting the completion time of a project is
one of the challenging tasks in project
management. There are many problems present
that can overrun this process such as the lack of
historical completion data, inadequate skill set,
and organization culture. There are many tools
used by project managers to generate probable
performance outcomes and one of them is the
Monte Carlo Simulation.
Cont.

•The Monte Carlo Simulation is a technique

that generates large volumes of probable
performance outcomes based on the
probability distribution of the schedule and
cost of individual activities. The outcome of
the simulation is used to create the
probability for the entire project.
Cont.
•The duration of the activities is simulated to
take random values with the help of a
random number generator. For every
simulation, a set of project completion time,
as well as the probability of completion, is
then calculated and stored as output. Once
the simulations are done, the result will yield
numerous project completion times and
completion probability values. The values will
then be plotted in a Histogram with an S-
curve to determine the probability of the
whole project.
THANK
YOU