Monte Carlo or Bust

A watertight risk model uses the Monte Carlo simulation as a predictive tool. Chris Kelly and David Alexander explain.

Japan has shown that the future is not only uncertain but that inter-related risks can escalate into human as well as financial catastrophe. Can board directors foresee in a systematic way the full range of business risks and their interdependencies?

Directors will be familiar with the typical risk matrix which shows a prioritised list of risks with estimates of likelihood and impact. If likelihood and impact are multiplied together and aggregated, this will show the organisation’s estimated mean exposure.

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