Practical Business Python

Taking care of business, one python script at a time

Mon 18 February 2019

Monte Carlo Simulation with Python

Posted by Chris Moffitt in articles   

There are many sophisticated models people can build for solving a forecasting problem. However, they frequently stick to simple Excel models based on average historical values, intuition and some high level domain-specific heuristics. This approach may be precise enough for the problem at hand but there are alternatives that can add more information to the prediction with a reasonable amount of additional effort.

One approach that can produce a better understanding of the range of potential outcomes and help avoid the “flaw of averages” is a Monte Carlo simulation. The rest of this article will describe how to use python with pandas and numpy to build a Monte Carlo simulation to predict the range of potential values for a sales compensation budget. This approach is meant to be simple enough that it can be used for other problems you might encounter but also powerful enough to provide insights that a basic “gut-feel” model can not provide on its own.