Wednesday, May 25, 2011

Deterministic vs. Stochastic Models

Most Excel models are determinimstic: the inputs don't fluctuate, so the outputs don't either.

But in the real world they both do.

Old School: using scenario manager to vary inputs, or doing it by hand.

New School: use Monte Carlo add-ons like @Risk or Crystal Ball to automate and keep track of simulations that generate probability distributions of outcomes.

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