Monte Carlo Simulation for Management

by Eugene Richman, Denis Coleman



The purpose of this article is to provide a better understanding of the capabilities and limitations of the simulation technique and to give a framework for the integration of the technical procedures with the management of a simulation project. Simulation is a means of approximating real life conditions for the purpose of generating a history, manipulating the model, and predicting the outcome in a real life situation. No model, by definition, can ever be as exact in every detail as the situation it is used to simulate. It can, however, be just as good and in some ways even better in doing what is intended, seeing how the real world situation will operate and doing it in a less costly and sometimes in a safer way. The object of a simulation is to determine quantitative predictions of system operations with sufficient accuracy to guide management to correct decisions at the least possible cost. There is a trade-off between model complexity and accuracy on one hand, and model cost and value of the result for the decision maker on the other.

California Management Review

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