x TV YOU ARE HERE: HOME » 8106» EXCEL TIPS & TRICKS » MONTE CARLO SIMULATION FORMULAIN EXCEL ~ Follow Excel TV FREE Dashboard Works! POWER OF FOR MONTE CARLO SIMULATION FORMULA IN EXCEL — TUTORIAL AND DOWNLOAD Meee wine on-amileyeci tina tao(October 26,2014 / Fxcel Tips Ticks / By Rick Gran / @COMMENTS hy e What is Monte Carlo Simulation? Monte Carlo Simulation is a process of using probability curves to determine the likelihood of an x TV love Ff ¥ Tweet In 3 ‘Thought you would never ask This is done by running the simulation thousands of times and analyzing the distribution of the output. This is particularly important when you are analyzing the output of several distribution curves that feed into ane another. Example: » #of Units Sold may have a distribution curve » multiplied by Market price, which may have another distribution curve » minus variable wages which have another curve Meee wine on-amileyeci tina tao Recent Posts Preparing fo! with Excel Contrarianist When to Bre Brad Edgar - Blogger & De Guru 2017 - Roac We're Going Need... Roac>» etc, ete Excel TV 201 Once all these distributions are intermingled, the output can be quite complex, Running thousands of iterations (or simulations) of these curve may give you some insights. This is particularly useful in analyzing potential risk to a decision. Describe Monte Carlo x TV love Ff Y Tweet in Shore 8 ‘many simulations of the games Tic Tac Toe to teach the computer that no one will will anuclear war ~ and save the world in the pracess, ‘Thanks Ferris. You're a hero. Here's a glimpse of the mavie to shaw you big time Monte Carla inaction. am assuming that you will overlook the politics, the awkward man hugging and of course, Dabney Coleman. Meee wine on-amileyeci tina tao rax TV love vt THE MONTE CARLO SIMULATION FORMULA Distribution Curves ‘There are various distribution curves you can use to set up your Monte Carlo simulation. And these curves may be interchanged based on variable, Microsoft doesn't have a formula called “Do Monte Carlo Simulation" in the menu bar @ Uniform Distribution Meee wine on-amileyeci tina tao oeIna.uniform distrib \n, there is equal likelihood anywhere between the minimum and a maximum, A uniform distribution looks lke a rectangle. £3 121.01 = +83 +RANDO"(C3-83) at ee ae a F a rin oRaNDM 100 "150 weTheLOVE f Share W Tweet In share Share This is also your standard bell shaped curve. This Monte Carlo Simulation Formula is characterized by being evenly distributed on each side (median and mean isthe same ~ and no skewness). The tails of the curve go on to infinity. So this may not be the ideal curve for house prices, where a few top end houses increase the average (mean) well above the median, arin instances where there is a hard minimum or maximum, An example of this may be the minimum wage in your locale, Please note that the name of the function varies depending on your version. sR =NOAMINRANOD Be) a a a man andrdSeiton HORNUNG in dd fe) imam "“Boom009 el Youn ato ete comps fran deena enero NORANYRANON ean, dno) Meee wine on-amileyeci tina taoLognormal Distribution A cistribution where the logarithm is normally distributed with the mean and standard deviation. So the setup is similar to the normal distribution, but please n variables are meant to represent the logarithm. that the mean and standard_dev Poisson Distribution Thisis likely the most underutilized distribution, By default, many people use anormal distribution, curve when Poisson is a better fit for their models. Poisson is best described when there isa large distribution near the very beginning that quickly dissipates to a ong tal on one side, An example of this would be a call center, where no calls are answered before second ZERO. Followed by the ‘majority of calls answered in the first 2 intervals (say 30 and 60 seconds) with a quick drop off in volume and a long tail, with very few calls answered in 20 minutes (allegedly). Meee wine on-amileyeci tina tao[=POISSON.DIST| | POISSON. DIST(x, mean, cumulative) x TV love Ff ¥ Tweet In 3 hight ritror au! your aata moaeung. 10 nina more curves, to go tne statistical Functions within your Excel workbook and investigate, If you have questions, pose them in the comments section below. Building The Model For this set up we willassume a normal distribution and 1,000 iterations. The setup assumes anormal distribution, A normal distribution requires three variables; probability, mean and standard deviation. We will tackle the mean and standard deviation in our first step. | assume a finance forecasting problem that consists of Revenue, Variable and Fixed Expenses. Where Revenue minus Variable Expenses minus Fixed Expenses equals Profit. The Fixed expenses are sunk cost in plant and equipment, sono distribution curve is assumed, Distribution curves are assumed for Revenue and Variable Expenses, wo Input Variables Meee wine on-amileyeci tina tao mm@%~. First Simulation SMEXCELTV —stoerhetove # Snare Tweet in nwuxmmaniyy wnere tne parameters are: » Probability = the funct the distribution. 1» RAND|) to elicit 2 random number based on the other criteria within » Mean = The mean used in the Step 1. For Revenue itis C3. » Standard Deviation = The Standard Deviation used in Step 1. For Revenue itis C& Meee wine on-amileyeci tina tao ooaah Mexcertv hare TheLOvE this to our advantage in the next step. 1,000 Simulations ‘There are several ways to do 1,000 or mare variations. The simplest option is to take the formula from step #2 and make it absolute. Then copy and paste 1,000 times. That's simple, but not very fancy. And if Ferris Bueller can save the world by showing a new Tic Tac ‘Toe game to a computer, then we can spice up this analysis as well. Let's venture into the world of tables. » First we want to create an outline fora table. We do this by listing the numbers 1 to 1,000 in rows. In the example image below, the number list starts in B12 > inthe next column, in cell C12, we will reference the first iteration. Meee wine on-amileyeci tina taoCHEXCELTV —staretTheto Ele slale » Next highiight the area where we want to house the 7,000 iterations » Select Data > Data Tables > For Column input cel: Select a blank cell. In the download fie, cell 011 is selected » Select OK Meee wine on-amileyeci tina tao2. Select Data > Data Table Table Pow nett Coun input: $0511 cance! f Snare W Tweet im Share 8) 3 Lo J x 2 » p e > Once OK is selected from the previous step, a table is inserted that autopopulates the 1,000, Meee wine on-amileyeci tina taoSSRGECEEEeevel mm: sass soaszzes 23087656 Eaesosas aassess6 ‘moss asia 1sses20 70 tazzasss ‘eaaezor Meee wine on-amileyeci tina taoOnce the simulations are run, ne to gather summary statistics. This can be done oe a number of ways. Ith example! used the COUNT function to determine the percentage of simulations that are unprofitable, and the ikethood of a profi than $1 Million, As expected, the likelihood of greater than $1M hovers around 50%, This is because we used normal distribution curves that are evenly distributed around the mean, which was $1M. The likelihood of losing money is & 8%. This was gathered by using the COUNTIFO function to count the simulations that were less than zero, and dividing by the 1,000 total iterations, x TV hare Meee wine on-amileyeci tina taorecat "Sting "Bron haa "yon ose rer tai [COUNTIFgfncion used fo prvi summary sabes f Share W Tweet Shere 8 Share Mexcertv hare The LO} aaa a ane ae ae spe RUMUNERSECEREEEE oe Monte Carlo Simulation Formula Download Download The Monte Carlo Simulation File IMeciuen wine onarileyeci tna aonNow What? In the video above, Oz asks about the various uses for Monte Carlo Simulation. What have you Used it for? Are there any specific examples that you can share with the graup? If so, leave a note below in the comments section, Also, feel free to sign up for our newsletter, so that you can stay up to date as new ExcelTV shows are announced. Leave mea message below to stay in contact. x TV shure TheLOVe # Share W Tweet in Share Leave A Comment About the Author Rick Grantham |.am the Director of Business Intelligence at a Consulting Firm and ‘am responsible for leading reporting and analytics deployments, | am also a Founder at Excel TV and am dedicated to making this ‘community a home base for Excel users. A place where experts share strategies to Cleanse, Automate and Visualize data, followmeon: yw ¢ Meee wine on-amileyeci tina taoRelated Posts 15 0ct, 2016, Mike Girvin Interview ~ Excel Array Formulas 1000ct, 2016 Protect Cells in Excel by Locking Scrollbar x TV love Ff ¥ Tweet In nner seeuUn Uperatur wIuTyanTEU RaNyES EALE! FPS art 11ERS Leave a Comment: Name * EMail* Website Ieee wine on-anileyect tna taoComment Post Comment Mexcertv hare Th 3 comments Excel Roundup 20141103 « Contextures Blog says November 3, 201% L..J Grantham explains what a Monte Carlo Simulation is, and shows how to run one in... > Reply Gerald says March 22015 Meee wine on-amileyeci tina tao ooHi Rick ~ great post. One typo though on second last line the copy should read *COUNTIF()" not “COUNTIT() + Reply x TV hare ‘Thanks Gerald. Correcting it now. + Reply Kevin Lehrbass says Mays, 2015 HiRick, Ihave tried explaining whata basic Monte Carlo simulation is man to send them the link to your article from now an. Great summary Meee wine on-amileyeci tina taoCheers, Kevin nttpfwww.youtube.com/user/MySpreadsheetLab > Reply ‘Thanks Kevin. I cant tell you how many times I've told people “It's lke that movie War Games" and they just gave me that blank stare, Reply anastasia says December 13,2015 Blank Stare + Reply Meee wine on-amileyeci tina tao 2Meee wine on-amileyeci tina tao Kevin says Way 26,2016 HiRick, TV hare f st Y Tweet in Sh 8 'kelinoad of losing money, | wanted to tind the likelineod ot losing money when, Condition A is met, then Condition 8, and so on? | think it would be easier to conditionally analyze a ful table rather than generating a new Monte Carlo simulation for each condition. Thanks, Kevin > Reply Isaac Hernandez says August 20,2016Great article and explanation of Monte Carlo simulation, That analogy to that scene in War Games is briliant and makesbtotal sense. + Reply Yeur ep Copyright 2016 by Excel TV Media Group LLC. Meee wine on-amileyeci tina tao with Me