Monte Carlo is known as “an international byword for the extravagant display and reckless dispersal of wealth” due to the world-renowned Place du Casino. People who enjoy the privilege of recklessly dispersing their wealth there do not have any issues playing with huge sums of money. Their wealth gives them the freedom of not accepting the chance of losing their money because it has no impact on their immense wealth. The French Riviera. Ahh… how wonderful that must be just to be able to visit Monte Carlo and the south of France. The thoughts about James Bond run through my mind, and I am reminded of his wins from what appeared to be a simple game of chance with extremely high stakes. For the people gambling can be enjoyable but we must be aware of our limits and could not be as fortunate. My visits to Las Vegas had a specific (gambling) budget as well as the expectation that all the money would be gone – the price of entertainment. I didn’t have any expectation that I’d leave with more money than I started with.
It is not a good idea to gamble with their money, especially in the case of investments that are intended to provide us with a retirement income or to help to pay for college, etc. These investments are serious and, in no way, do us want to see them as betting on the future. In fact we are extremely cautious about investments to the extent that we might decide to not invest in something we don’t feel confident with, even if we are told of high yields. The majority of the time, the reason for discomfort is the lack of confidence in the results that the money will bring. For instance, what happens to my investment if the rate of inflation is not in line with the forecast or if the predicted earnings do not meet expectations? If we had an eye that was able to reveal the future figures for these numbers be, we could quickly estimate the results. Investment decisions can then be made with more certainty.
The usual method to determine the results for an investment would be to create formulas that include numerous variables that determine the final result. Since these variables are variables that may ‘change’ based on a variety of unpredicted future circumstances, we need to choose one quantity for each of the variables that we enter into our calculation. A good example of this is the variable income. In a company it is common to use historical numbers (like the last three months ‘ income) to determine the future performance however we recognize that it can easily and likely differ from the numbers we pick. This method of computing with particular numbers is referred to as determinate, which means that the final result will yield one number as a result. Adjusting variables requires calculating many times, leading to different numbers. The question is which one should we put the money in?
Another method of calculating the outcome is known as probabilistic. Instead of using fixed numbers to generate the result of a single number this method permits variables to naturally “vary depending on their historical probabilities. For example, we can employ historical data as our anticipated income figure however it may be lower or even a higher one. We can define the boundaries of the high and low numbers based on their probabilities with a certain degree of certainty, i.e. the least likely number and the most probabilities. Instead of selecting one number to use to calculate our probability it is possible to use the range of numbers that are the most likely, which gives us greater confidence that we’ve all the possibilities. The outcome of this calculation is an outcome distribution that is a probability (think normal distribution curves in your stats class). This is the probability of any outcome we’re interested in. For instance, if we are hoping to earn 10% on the investment we can examine the results and determine the odds of obtaining the 10 percent return. From the same graph is a way to determine the chance of a return (5 percent 10, 10%, 15 percent and so on). By using this information we can predict outcomes with a greater degree of certainty.
Monte Carlo is also the name used to describe a commonly used method that is a probabilistic one. The name was picked by scientists working undercover during nuclear research in the 1940s. The Monte Carlo Method is a broad class of computational algorithms that rely on repeated random sampling to obtain numerical results. It may sound complicated, and indeed it is, requiring a lot of computing power, but the results are extremely valuable in making Real Estate Investment decisions. The difference lies in a qualifier (“your results could range from 10 to 10 percent”) as opposed to the quantitative assertion (“there is 60% chance your returns will be 10 %”). %”). I use the Monte Carlo method to calculate the returns from apartment investments. The results let me choose investments based on quantifiable reliability. Engineering training has taught me how to use all the tools I have available and this is among the most effective. It allows me to make decisions with greater certainty and buy apartments Monte Carlo style!
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