by CIO Staff

Monte Carlo vs. Decision Tree Simulation Tools

Jul 01, 20031 min
Risk Management

Both Monte Carlo and decision tree analyses are powerful tools, but each has its particular strengths. Monte Carlo simulations are good for accounting for multiple risks occurring simultaneously. Decision trees excel at analyzing sequential risks compounding over time. Given those frameworks, here’s a look at several scenarios and whether you would be better off rolling the dice or climbing the tree.

Decision Tree Monte Carlo

Decision based on monetary value Decision based on criteria other than value, such as a schedule

Sequential decisions required Decisions involve one variable

Few variables or low probability variables that are easily calculated More than five variables in complex environment

Analyzing two possible decisions against each other Analyzing an entire portfolio strategy

Source: Risk And Decision Analysis In Projects By John R. Schuyler