Financial planners love the Monte Carlo simulation, so named after the gambling casino in the administrative area of the Principality of Monaco.
In Monte Carlo, known for its prominence, one can never be certain if a particular gambler will win or lose but one can be certain that, overall, the casino will never lose. This is because the games played in casinos have a slight advantage to the casino, so given a large number of gamblers - some winning and some losing - the average result will always be in the casino's favour.
Monte Carlo simulation depends on the fact that the results of a large number of individual random events will accurately describe the probability distribution of the individual event.
It may sound simple, but many of us, either on a personal basis or representing businesses, end up letting the positive possibilities sway us, rather than heeding the warning signs. The basic question should always be: Is the financial decision I am making based on reliable information, that has been modeled and forecast, or on gut instinct?
In real life financial modeling is the construction and use of planning and decision models before making a major financial investment based on financial data to simulate actual circumstances in order to facilitate decision making within an organisation. An individual or even an investor can create a list of pro's and con's, realistically weigh up the benefits and ask "what if?"
By engaging in financial modeling, one validates strategies prior to execution through proper forecasting, scenario building, and financial considerations while better understanding the impacts of future financial burdens.
Financial modeling helps everyone, a business leader, investor and even a private citizen to make sound business decisions and create healthy strategies with greater speed and accuracy.
Here are a few financial modeling tips: