Comments on: Why going to Monte Carlo loses you money http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Robin75 http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-21923 Tue, 14 Dec 2010 20:04:40 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-21923 We agree the most important thing with Monte Carlo simulations is actually the relevance of the stochastic model and the assumptions it is made of.

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I will be interested to know your opinion since it’s a bit different from its competitors: you can correlate directly input variables with formal expression (e.g.: X3=Exp(X1)+ln(X2^2+1), …), export raw data in a text file and other good stuffs.

You can download a 15-day evaluation version freely (no personal information required). Also I will give a free 3-month subscription to the readers of this blog (this offer runs until march 2011 ;-). Just send me an email to support@statscorer.com mentioning you are a reader of Reuter’s blog.

You can visit http://www.statscorer.com to get many detailed examples of how to create stochastic models in Excel with Statscorer. Finally, I will be glad to help you to define your finest financial model.

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By: afan http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17751 Fri, 27 Aug 2010 21:23:47 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17751 They could have simply said “As everyone knows, stock distributions have fatter tails than the normal distribution”. But that would have made for a very short article, no alarming claims (since it is hardly news), and not much of a basis for marketing their services.

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By: Developer http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17710 Thu, 26 Aug 2010 21:30:41 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17710 Here is a question. What is the best model of stock markets out there? The data presented here is only for 50 years and for one country.

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By: Greycap http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17697 Thu, 26 Aug 2010 18:01:11 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17697 Oh dear. Worse and worse.

Suppose I asked you to guess what the historical quarterly return measuring back from a random date in the last 50 years. You would answer some number. Now if I told you that the historical return for the quarter starting one day before the chosen date was -40%, would your answer change? This effect is called serial autocorrelation. Even if you believe that quarterly returns from non-overlapping periods are drawn independently from the same normal distribution, returns from overlapping periods are obviously strongly correlated.

Now, treat these rolling returns as sample draws from a distribution and measure the sample mean and variance. If you take independent draws from a normal distribution with this mean and variance, will the sample distribution converge to the historical distribution? No it will not – not even if the real historical distribution over non-overlapping periods was a stationary normal distribution.

It is a bit of work to set up a monte carlo that correctly simulates overlapping returns given the assumption that non-overlapping returns are stationary and normal. Has Welton done this work? There is no way of telling from the sales pitch. But given that they have a financial incentive not to do so, I am skeptical.

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By: ckbryant http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17691 Thu, 26 Aug 2010 14:52:00 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17691 I’m not yet going to call myself an “advocate” of his, but I’ve been learning a lot from James Otar, http://www.retirementoptimizer.com/, and he seems to have some valuable ideas. He rejects Monte Carlo simulation entirely in favor of using historical scenarios based on the last hundred years or so. That is, he transports you and your savings to the year 1900, then the year 1901, 1902, and so on, and evaluates strategies accordingly.

There are of course criticisms that can be leveled, but neglecting tail risk does not seem to be one of them.

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By: Thucydides http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17690 Thu, 26 Aug 2010 14:41:52 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17690 Let’s not lose sight of the facts here. Regardless of the “Monte Carlo” debate…it is clear from recent events in the financial markets that the “science” of predictive modeling in the realm of economics and financial markets/assets, has a long way to go. In the field, there are simply too many “unknowns” that are still unknown. The “discrepencies” in the data between “predictive” and “actual” make an obvious statement as to the degree to which this is demonstrably true. This is why, many of us, who use statistical-based analyses/methodologies focus on relative or “comparative” analyses between variables as opposed to “absolute outcomes” or “predictions.”

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17688 Thu, 26 Aug 2010 14:29:26 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17688 Anyone thinking of investing with the authors of this paper should thank Mr Salmon for demonstrating what utter frauds they are. It is a slightly less clever version of what Taleb does – make trivial claims dressed up as “clever” showing that those guys who seemed so much smarter were actually idiots. Of course Taleb is smart enough to be vague about what he is claiming because then you can’t actually nail him down.

By the way, you have any proof that Moody’s were assuming lognormal distributions in their models?

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By: bidrec http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17687 Thu, 26 Aug 2010 11:45:38 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17687 In his autobiography Stanislaw Ulam who came up with the Monte Carlo Method was rather dismissive of it. He attributed the method’s popularity to the name he gave it.

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By: danm6 http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17677 Thu, 26 Aug 2010 01:35:38 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17677 Most of the comments about Monte Carlos are spot on, especially the first one. But, one post is clearly incorrect: Monte Carlos do not assume normal distribution. I, for example, us a neutron/photon transport Monte Carlo that assumes nothing but the physics underlying the transport. It very accurately predicts transport in very complex geometry.

Now, we know the physics underlying the transport, we know far less about economics. We do know some things. What Monte Carlo’s allow us to do is determine results from a given set of inputs. If the inputs assumptions are wrong, then the results will be wrong. But, the advantage of Monte Carlos is that we need not make a simplifying assumption just to use the technique than one relying on false assumptions. A good example of this is the value in in hindcasting as a means of training hurricane models.

Ecconomic predictions will always have uncertainties. But, Monte Carlo techniques can utilize every scrap of informaton that is available. One can look at all sorts of patterns, and try to hindcast them with assumptions. That doesn’t guarantee predictive power, but one has a better chance with a model that hindcasts near perfectly than with one that is based on false simplifying assumptions, like normal distributions.

I don’t know the author, but I’d guess that the author is not well versed in modeling.

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By: davidharper http://blogs.reuters.com/felix-salmon/2010/08/25/why-going-to-monte-carlo-loses-you-money/comment-page-1/#comment-17675 Thu, 26 Aug 2010 00:49:30 +0000 http://blogs.reuters.com/felix-salmon/?p=5092#comment-17675 a total disservice to the many professionals who use MCS and know what they are doing.

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