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05.5_Monte Carlo Simulation in EXCEL

05.5_Monte Carlo Simulation in EXCEL - Monte Carlo...

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Monte Carlo Simulation in EXCEL Monte Carlo simulation allows us to approximate results of random experiments and random variables by actually “simulating” the outcomes of many many trials of the experiment. For example, suppose I posed the following problem: Roll 5 dice and let random variable X = the minimum of the numbers showing. What is the distribution of X? It might be possible to find the exact distribution of X using probability theory, but let’s suppose that it is too hard or too complicated (it is not that easy!). An alternative would be to get 5 dice, and run the experiment, say, 1000 times, observing the minimum of the five dice in each of the 1000 trials. Then we can approximate P(X=1) using the number of trials where the minimum was 1 divided by 1000. We can use the same logic to estimate P(X=2) thru P(X=6). This would give us a good approximation to the true distribution. Rolling dice 1000 times sounds time consuming. But what if we could use the computer to do the work for us? That is exactly what Monte Carlo simulation does!
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