One who intends to leave others better off for his having existed.

9/19/11

Monte Carlo

… 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


 


Eleanor Laise


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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