Real-World Project Management: Beyond Conventional Wisdom, Best Practices, and Project Methodologies

Chapter 10. Monte Carlo Analysis

"There are three kinds of lies: lies, damn lies and statistics."

—Benjamin Disraeli

The monte carlo analysis is named for the famous casinos on the Mediterranean in the south of France. It is a statistical tool that helps decision makers create a somewhat accurate ballpark estimate—not just which ballpark you're in, but the size of the ballpark, where in the ballpark, and how much of the ballpark we're talking about. It is particularly useful when a decision has to be made that involves a fair level of uncertainty or in which there are multiple unknowns that have to be solved for your equation. (Contrary to what your high school math teacher told you, there is a way to solve for equations with multiple unknowns—it's called the Monte Carlo analysis!)

Here's the basic idea: In most games of chance, whether it be throwing dice or picking numbers on a roulette wheel, there are specific patterns that emerge based on the probability that certain numbers will turn up with any particular frequency.

For example, if you are gambling on a specific outcome if you roll a six-sided die, the probability that any number will be thrown, 1 through 6, is one out of six equally.

That is a fairly simple and obvious deduction to make. Things start to get complicated when you add a second die to the throw. Now you have results that can range from a low of 2 to a high of 12. What is the probability that you will throw any number between 2 and 12?

The grid in Figure 10.1 shows ...