What is Monte Carlo Simulation? – RiskAMP

Summary

Despite the multitude of studies on Monte Carlo simulation that are highly sophisticated in their nature, Risk AMP a company which specializes in designing and developing statistical and stochastic models over a variety of test platforms, devised a concise article outlining directly what Monte Carlo simulations contribute to analysts and decision makers. Namely, a “Monte Carlo simulation, or probability simulation, is a technique used to understand the impact of risk and uncertainty in financial, project management, cost, and other forecasting models.”

Monte Carlo simulations are designed to assess uncertainty within a specific problem to give early warning to decision makers. In doing so, quantitative models are created to project into the future to give the analyst and decision makers the “best” estimate of the expected values or outcomes. Although on the same side of the coin, estimates generated by Monte Carlo simulations contain, “inherent uncertainty and risk, because it’s an estimate of an unknown value.” RiskAMP assess Monte Carlo simulations to be different from standard forecasting models since these simulations provide ranges of outcomes which present upper bound and lower bound limits to future possible outcomes.

The Monte Carlo simulation runs a randomized set of tasks which calculates those independently to the further calculate hundreds or thousands of randomly-selected values in the model against each other. This process of calculating outcomes is done until the model has reached the primary results in the model.

The paper discusses a basic example through job tasks over a series of months. To do this the model generates three distinct estimates to evaluate the frequency of a particular job taking place and rates of those jobs as what the probability is that they will occur frequently in the same time interval. Further, the Monte Carlo simulation, “will randomly generate values for each of the task, then calculate the total time to completion.

To the aforementioned end, it is “extremely unlikely,” that the simulation will assess that the absolute outcomes will be observed in reality to at the minimum or maximum total values delineated in the model. For instance, it is unlike something will have 100% certainty or 0% certainty. However, risk is built into the model due to the overall ability of an outcome to take place over instances which are assessed by the model to have a low probability.

Finally, like all forecasting models, RiskAMP assesses that the Monte Carlo simulation is only as good as the “assumptions” the analysts develop and build into the simulation. Additionally, they make the distinction that, “it’s important to remember that the simulation only represents probabilities and not certainty.” Regardless, RiskAMP contributes that Monte Carlo simulations can be “valuable tool[s]” when forecasting into the unknown.

Critique

As stated at the outset, this article has an effective way of portraying the complex ideas of Monte Carlo simulations with concision and without getting down in the technical mathematical jargon. That said, the article hit on a touchstone of how Monte Carlo simulations could be effective for forecasting into the future with accuracy, but did not completely flesh out those concepts. In the end, however, this article is beneficial or anyone who is looking to understand at a basic level how Monte Carlo simulations can better help develop insights and inform decision making about the future.

Source

What is Monte Carlo Simulation?, RiskAMP.

Summary of Findings: Wargaming ( 4 out of 5 Stars)

Note: This post represents the synthesis of the thoughts, procedures and experiences of others as represented in the articles read in advance (see previous posts) and the discussion among the students and instructor during the Advanced Analytic Techniques class at Mercyhurst University in October 2016 regarding War Gaming as an Analytic Technique specifically. This technique was evaluated based on its overall validity, simplicity, flexibility and its ability to effectively use structured data.

Description:

War gaming is a modifier that allows participants to engage in a scenario that takes information from other analytical techniques and tests them. This testing helps the participants to better understand the given instance and check assumptions. Wargaming has generally remained in the realm of the military, but has in recent years began to move to private sector usage.

Strengths:

• Can create insight into possible avenues of attack/approach not previously considered
• Gives an alternate perspective for situational analysis and evaluating scenarios
• Structured
• Incorporates role-playing, which research suggests improves forecasting accuracy
• Its structure allows replicability of the war game
• Allows decision makers the opportunity to practice making decisions they may have to realistically make in the future.

Weaknesses:

• Often complex, costly, and time-consuming
• Validity is an issue
• Can’t plan for unexpected variables/events
• Realism is often difficult to achieve

How-To:

1. Identify an issue that requires analytic assessment.
2. Develop the foundation of the simulation based on known data available at the time
3. Run the simulation until complete
4. Compare and analyze the results toward reality
5. Re-run the simulation as necessary to improve confidence in the results

Application of Technique:

A game of strategic Battleship was played for an in-class exercise.  The class was divided into two teams of four.  Teams consisted of 3 primary roles: game master, advisors and spies. The game master controlled where strikes would be made, advisors and spies were both trying to influence strike locations. Spies would also try to secretly communicate with the opposite team’s game master revealing their team’s positions.  The game master was secretly informed who their spy was while the individual spying against them was hidden.  The game master had to decide who to listen to and who to ignore while planning their moves.

For Further Information:

War Gaming Wikipedia:

https://en.wikipedia.org/wiki/Wargaming

Game Review: ‘Command’ is A Worthy Successor to Harpoon:

https://news.usni.org/2013/09/24/game-review-command-worthy-successor-harpoon

Harpoon Game Review:

http://www.matrixgames.com/products/323/details/Harpoon.3.-.Advanced.Naval.Warfare

The Art of War:

http://www.puppetpress.com/classics/ArtofWarbySunTzu.pdf

Chess Wikipedia:

https://en.wikipedia.org/wiki/Chess

Battleship Game, Wikipedia:

https://en.wikipedia.org/wiki/Battleship_(game)

Fuld and Company - Ken Sawka, Wargaming:

http://insights.fuld.com/blog/topic/war-games

Competitive Insights - Wargaming:

http://insights.fuld.com/war-games-in-an-era-of-collaboration-white-paper-fuld-and-company

Why Wargaming Works

Synopsis

When a report is titled something to the effect of “Why X Works,” I take notice. Within the first few paragraphs, the authors state that wargaming’s power and success is derived from its ability to enable individual participants to transform themselves by making them more open to internalizing their experiences in a game. Through these “synthetic experiences,” the brain has a chance to utilize a story and the game itself to create a suspension of disbelief that allows the player to internalize the scenario and information.

Via a story, a suspension of disbelief occurs as readers/listeners experience the vicarious emotions and actions brought out by the narrative. This in turn allows the participants to enter the situation being described and, in effect, become one with it, provided they are willing to do so.

When suspension of disbelief occurs, the reader’s brain enters into a state where all of the information provided at the time of reading is believed. As the brain processes the information, two systems come online to process the information at two different levels. The “automatic” system processes the information and believes it. The secondary system, the “systematic” system, starts to parse out information that it believes and does not believe. In fiction, the suspension of disbelieve sedates the systematic system and the information is more readably believed and internalized.

When applied to a game, these effects of story and brain function allow the game to have real weight and impact on the player. It becomes “real” to them, or at least more real than just reading about it via a report could achieve. The base purpose of what the game is trying to convey or teach integrates itself into the player. This takes place via the venue, controls on the game, kinesthetic inputs, social cues, and personal cues. The combined effect is actually strong enough for the authors to point out that there are key issues that need to be controlled for, those being wrong information and a lack of important information.

Finally, Perla and McGrady state that wargaming needs to move beyond from what they perceive as an art form into a more scientifically controlled process. While wargaming should not give up its story telling ability, it needs to be better tooled into a more adaptable device.

Critique

I am hard pressed to find anything I dislike with this. The report is well sourced and from a reputable institution (The Navy War College). The authors look at everything from the fiction in a wargame to how the brain handles these inputs. They caveated their findings with how you can get a wargame wrong and what those are and how to avoid them. If there is one thing, and it’s ultimately minor, some more research into a success rate would have only helped their case. That aside, its well-reasoned and makes sense. In video gaming, immersion is what helps to draw a person into a game and keep them there for hours. If a game’s ability to immerse the player is strong enough, that can carry over into the real world. Messages, ideas, MacGuffins, or other parts of the game can stick with a player for a long time. Why can’t those be applied to a training event that helps a person or team understand a real world scenario? If you insure that the information being provide in the game is as accurate as possible (omissions, embellishments, or falsehoods) then that does strike me as a valid method.

 

        Perla, P. P., & McGrady, E. D. (2011). Why wargaming works. Naval War College Review, 64(3), 111.

Ex Ante Strategy Evaluation: The Case for Business Wargaming

Summary

This article examines how business wargaming can benefit business managers with strategy-making in comparison t0 using computer-based simulations and scenario planning. The author, Jan Oliver Schwarz, finds that business wargaming  helps facilitate an ex ante evaluation of strategy; which he describes as the act of testing strategies prior to their implementation. Schwarz defines business wargaming as a "dynamic strategic simulation". The main difference, as described in this article, between business wargaming and scenario planning is that business wargaming focuses on the views of competitors, whereas it is difficult to incorporate competitor views in a scenario exercise. In regards to computer-based simulations, Schwarz states that these simulations represent the perspective of the analyst that created them. This contrasts from business wargaming, as Schwarz explains, because business wargaming may include computer-based simulations, but it is driven by its participants and not by the model of the simulation.

Before explaining the business wargaming process and its advantages, Schwarz highlights the important steps in the strategy-planning process. According to Schwarz, planning a strategy within a business begins with setting objectives, an analysis of the company and its environment, creating a set of strategic options, and then developing strategic plans from the proposed strategic options. Business wargaming allows for this, as it utilizes the participation of  an industry's competitors, clients, market experts, and wargaming experts. The business wargaming process begins in the present and is based on available data retrieved from extensive research on the industry in which the business takes place. The client team, which consists of the business manager's role, must create and adjust its strategies according to the decisions made by the stakeholder and customer teams. A diagram of the business wargaming process is illustrated below in Figure 1. Following the completion of the process, the managers of the client company and the wargaming experts carry out an analysis of the exercise and discuss their findings.


 


Schwarz  explains that managers can benefit from using business wargaming because it allows them to actively participate in developing a strategy that is future-oriented. This is crucial for an ex ante evaluation of strategy.  Business wargaming also allows the managers to experience the consequences of their strategies, and in turn allows them to identify the early signals of change that pertain to their industry. In Figure 2, Schwarz provides a chart of these advantages, which he pulls from previous research and literature, to portray how business wargaming is a useful form of ex ante strategy evaluation.

 


Source 

Schwarz, J.O. (2011). Ex ante strategy evaluation: The case for business wargaming. Emerald Group Publishing Limited, 12(3), 122-135. Retrieved from: https://www.researchgate.net/profile/Jan_Oliver_Schwarz/publication/254191296_Ex_ante_strategy_evaluation_The_case_for_business_wargaming/links/53dca7430cf2cfac992909ff.pdf