Definition of Monte Carlo Technique (METHOD, OR ANALYSIS)

special type of simulation, where the variables of a given system are subject to uncertainty. The technique gets its name from the famous Mediterranean resort often associated with games of chance. In fact, the chance element is an important aspect of Monte Carlo simulation: the approach can be used only when a system has a random, or chance, component. Under this approach, a probability distribution is developed that reflects the random component of the system under study. Random samples taken from this distribution are analogous to observations made on the system itself. As the number of observations increases, the results of the simulation will tend to more closely approximate the random behavior of the real system, provided an appropriate model has been developed. Sampling is accomplished by the use of random numbers. Simulation applications include testing alternative inventory policies and simulating a cash budget.