Monte Carlo Simulation
When a system contains elements that exhibit chance in their behavior, the Monte Carlo method of simulation may be applied. The basis of Monte Carlo simulation is experimentation on chance (or probabilistic) elements by means of random sampling.
The technique breaks down into five simple steps:
Setting up a probability distribution for important variables.
Building a cumulative probability distribution for each variable.
Establishing an interval of random numbers for each variable.
Generating random numbers.
Actually simulating a series of trials.
Let’s examine these steps in turn.
Step 1. Establishing Probability ...
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