Quick Answer: A Monte Carlo simulation is a mathematical technique that predicts the probability of different outcomes by running a scenario thousands of times, substituting random values for unpredictable variables every time. It uses randomness to map out the future.
The Casino Origin
Invented during the Manhattan Project to model nuclear fission, the algorithm was named after the famous Monte Carlo Casino. Why? Because the core of the algorithm relies on the same sheer repetition of random events (like spinning a roulette wheel) to reveal long-term probabilities.
How Financial Advisors Use It
If you want to know if you will run out of money in retirement, the math is impossible because stock market returns and inflation fluctuate wildly. A Monte Carlo simulation fixes this by simulating your life 10,000 times. Each simulation randomly selects different market returns based on historical volatility. If you survive in 9,500 out of 10,000 simulations, you have a 95% chance of retiring safely.
How it Solves Complex Physics
Some physics equations are so monumentally complex that no supercomputer can solve them analytically. Monte Carlo provides an approximation. By randomly sampling millions of points within a complex system and averaging the results, computers can solve equations that would otherwise be impossible.