Monte Carlo Simulation: Still Stuck in Low Gear

McCarthy, Ed
January 2000
Journal of Financial Planning;Jan2000, Vol. 13 Issue 1, p54
Academic Journal
This article examines the reasons for financial planners' slow adaptation of Monte Carlo simulation (MCS). Spreadsheet mastery is the first requirement for working with add-ins; a solid grasp of statistics is the second. MCS add-ins rely on the user to supply the statistical distribution and its parameters. In other words, the user must specify the particular distribution from which the software will sample, and that distribution's mean and standard deviation. This input requirement is another hurdle that has been slowing planners' adoption of MCS. Planners can benefit from the technology, but a lack of spreadsheet skills and statistics knowledge was holding back many potential users. Economist Lynn Hopewell expressed many planners' hopes for dedicated MCS software: the major software players are aware of simulation, and there are indications that this is the next level of sophistication for any tool that models the future and has uncertain variables. The arrival of these dedicated programs has motivated some planners to begin using MCS, even in cases where their initial investigation of the technology discouraged them.


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