Shining a light on uncertainty


Morningstar's Paul Kaplan and Sam Savage of Vector Economics, explain how Monte Carlo Simulation is used to make probablistic predictions in investment

In 1946, a Polish-born mathematician named Stanislaw Ulam was whiling away the time while recovering from an illness by playing solitaire, and began to wonder about the likelihood of success. So he stopped playing with the cards, and returned to his profession of mathematics by trying to calculate the percentage of successful games out of all possible shuffles. This turned out to be harder than he thought. So he came up with an alternative method using the power of a high speed computer to simulate one hundred card shuffles and then simply count the number of winning hands. Thus was bor...

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