The activity of business is seldom unaccompanied by risk and uncertainty. Many organizations readily acknowledge this reality; however, very few organizations can quantitatively incorporate risk and uncertainty into their business planning processes. Monte Carlo methods can be quite instrumental in transforming an organization’s planning process from a deterministic fallacy, focused on managing numbers, to probabilistic insight, focused on managing risk and uncertainty.

What Are Monte Carlo Methods?

Quite often, Monte Carlo implies an iterative computational method in which the input variables of each iteration are randomly generated from a specified distribution.

For example, take the following equation: Profit = Revenue - Cost

Here, Profit is an output variable, whereas Revenue and Cost are input variables. For the purposes of discussion, assume the following:

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