Understanding how to use Monte Carlo simulation to account for risk in decision-making is quickly becoming a required skill for today’s business leaders, says Asher Drory, Adjunct Professor of Finance at University of Toronto’s Rotman School of Management.
“Many leading corporations are now using Monte Carlo simulation in their business cases,” Professor Drory says. “Students who want a leg up with such corporations should seek out all opportunities to get experience in working with Monte Carlo simulation.”
In his Financial Management course, Drory uses @RISK to teach some 200 graduate students each year how to use Monte Carlo simulation in analyzing working capital and capital budgeting decisions. Monte Carlo simulation furnishes the decision-maker with a range of possible outcomes and the probabilities that will occur for any choice of action.
For example, Drory's classes use @RISK and Monte Carlo simulation to look at:
- How forecasts of financial statements are needed to determine future funding requirements in working capital decisions.
- How forecasts of future free cash flows are required and risk must be assessed in capital budgeting analysis.
Separately, Drory and his students use Palisade’s PrecisionTree software in modeling decision tree analysis for new product development. The students have access to the entire DecisionTools Suite which is loaded on all of the computers in the Rotman Finance Laboratory.
“All key financial decisions such as investing, operating and financing decisions can benefit from Monte Carlo simulation,” says Prof. Drory, who has taught at the University of Toronto for 21 years. “I ran across @RISK about 5 years ago when I was looking for PC-based Monte Carlo simulation tools. @RISK has a straightforward and easy-to-use interface.”