6Simulation of Outcomes: Simulation is a Practical, Efficient Way to Explore Uncertainty and to choose between Alternative Strategies for Managing it
You now have the background to learn about simulation as the essential tool for dealing with uncertainty in making investment and development decisions in real estate. What we call “Monte Carlo” simulation provides the means to analyze and evaluate alternative flexible management strategies.
In general, a simulation is a way to explore what might happen in the real world. It uses some model of reality—physical or mathematical—to run a “what‐if” analysis. That is, it provides an answer to the question: What would the outcome of a certain model be if certain input conditions apply?
As we have stressed, we cannot adequately consider uncertainty and estimate the value of flexibility by focusing only on the mean of the outcome distribution. We have to move beyond the traditional, single‐stream DCF model. We need to consider the entire distribution of future possibilities. Monte Carlo simulation ...
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