… a "Monte Carlo" simulation, commonly used in financial planning
estimates the odds of reaching retirement financial goals.
Though these tools typically run through hundreds or thousands of potential market scenarios,
they often assign minuscule odds to extreme market events.
Yet these extreme events seem to be happening more often.
If causes, actions or winners have effects, reactions or losers
and A is caused, allowed, accelerated, held back or prevented
is it better to pre-think what could happen to B, C and D
than not?
The questions about Monte Carlo tools
reflect broader concerns about mathematical models
for gauging portfolio risks
These models were supposed to help quantify and manage the risks
of...complex instruments
If achievement takes less time with a rational plan
can you get farther faster than those without
and vice versa?
But given the events of the past couple of years
it appears that the models often gave big institutions
as well as small investors, a false sense of security
Critics emphasize that the problem isn't Monte Carlo itself
but the assumptions that go into it
If some financial estimates and hypothetical illustrations
assume perpetual levels of varying data
can probability be manipulated?
Is the present you the only who
who’s going to care for the future you?
Since no standard approach exists
one user might plug in a range of assumptions on interest rates
inflation or volatility that is different from another user
Some industry participants and academics
are pushing for Monte Carlo tools to more clearly illustrate
the scarier scenarios
The Wall Street Journal, May 2, 2009
If there are at least 15,000 professional American Economists
and less than 1% foresaw the financial crisis
and many mathematical based financial prognostications
were relatively useless
which if left in place
could negatively affecting the future
should some try to fix what’s probably broken?
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