Unit 4: Monte Carlo Methods

Contents
1.0 Introduction
2.0 Intended Learning Outcomes (ILOs)
3.0 Main Content
3.1 Overview of Monte Carlo Method
3.2 History of Monte Carlo Method
3.3 Applications of Monte Carlo Methods
4.0 Self-Assessment Exercise(s)
5.0 Conclusion
6.0 Summary
7.0 Further Readings

1.0 Introduction
Monte Carlo methods (or Monte Carlo experiments) are a class of computational algorithms
that rely on repeated random sampling to compute their results. Monte Carlo methods are
often used in simulating physical and mathematical systems. The methods are especially
useful in studying systems with a large number of coupled (interacting) degrees of freedom,
such as fluids, disordered materials, strongly coupled solids, and cellular structures. More
broadly, Monte Carlo methods are useful for modelling phenomena with significant
uncertainty in inputs, such as the calculation of risk in business. These methods are also
widely used in mathematics: a classic use is for the evaluation of definite integrals,
particularly multidimensional integrals with complicated boundary conditions. It is a widely
successful method in risk analysis when compared with alternative methods or human
intuition. When Monte Carlo simulations have been applied in space exploration and oil
exploration, actual observations of failures, cost overruns and schedule overruns are routinely
better predicted by the simulations than by human intuition or alternative "soft" methods.

2.0 Intended Learning Outcomes (ILOs)

By the end this unit, you should be able to:
Describe Monte Carlo method
Trace the origin of Monte Carlo method
Give examples of the application of Monte Carlo method

3.0 Main Content

3.1 Overview of Monte Carlo Method
There is no single Monte Carlo method; instead, the term describes a large and widely- used
class of approaches.
A Monte Carlo algorithm is an algorithm for computers. It is used to simulate the behaviour
of other systems. It is not an exact method, but a heuristic one. Usually it uses randomness
and statistics to get a result.

It is a computation process that uses random numbers to produce an outcome(s). Instead of

having fixed inputs, probability distributions are assigned to some or all of the inputs. This
will generate a probability distribution for the output after the simulation is run

However, these methods tend to follow the algorithm below:

1. Define a domain of possible inputs.
2. Generate inputs randomly from the domain using a certain specified probability
distribution.
3. Perform a deterministic computation using the inputs.
4. Aggregate the results of the individual computations into the final result.

1. Draw a square on the ground, then inscribe a circle within it. From plane geometry,
the ratio of the 4.
2. Uniformly scatter some objects of uniform size throughout the square. For example,
grains of rice or sand.
3. reas in
approximately the same ratio. Thus, counting the number of objects in the circle and

/ 4.
4. itself.

we define an input domain: in this case, it's the square which circumscribes our circle. Next,
we generate inputs randomly (scatter individual grains within the square), then perform a
computation on each input (test whether it falls within the circle). At the end, we aggregate

Note, also, two other common properties of Monte Carlo methods: the computation's reliance
on good random numbers, and its slow convergence to a better approximation as more data
points are sampled. If grains are purposefully dropped into only, for example, the center of
the circle, they will not be uniformly distributed, and so our approximation will be poor. An
approximation will also be poor if only a few grains are randomly dropped into the whole

dropped more uniformly and as more are dropped.

To understand the Monte Carlo method theoretically, it is useful to think of it as a general

technique of numerical integration. It can be shown, at least in a trivial sense, that every
application of the Monte Carlo method can be represented as a definite integral.
Suppose we need to evaluate a multi-dimensional definite integral of the form:

Most integrals can be converted to this form with a suitable change of variables, so we can
consider this to be a general application suitable for the Monte Carlo method.

The integral represents a non-random problem, but the Monte Carlo method approximates a
solution by introducing a random vector U that is uniformly distributed on the region of
integration. Applying the function f to U, we obtain a random variable f(U). This has
expectation:

where is the probability density function of U. Because equals 1 on the region of

integration, [7] becomes:

Comparing [6] and [8], we obtain a probabilistic expression for the

so random variable f(U

[10] is an estimator that depends upon a sample {U[1]}of size one, but it is a valid estimator
nonetheless.

accommodate a larger sample {U[1], U [2] U [m]}. Applying the function f to each of these
[2]
yields m independent and identically distributed (IID) random variables f(U [1]), f(U
f(U [m]

is an unbiased estimator

If we have a realization {u[1], u[2] u[m]} for our sample, we may

We call [11] the crude Monte Carlo estimator. Formula [12] for its standard error is
important for two reasons. First, it tells us that the standard error of a Monte Carlo analysis
decreases with the square root of the sample size. If we quadruple the number of
realizations used, we will half the standard error. Second, standard error does not depend
upon the dimensionality of the integral [6]. Most techniques of numerical integration such
as the trapezoidal rule or Simpson's method suffer from the curse of dimensionality.
When generalized to multiple dimensions, the number of computations required to apply
them, increases exponentially with the dimensionality of the integral. For this reason, such
methods cannot be applied to integrals of more than a few dimensions. The Monte Carlo
method does not suffer from the curse of dimensionality. It is as applicable to a 1000-
dimensional integral as it is to a one-dimensional integral.
While increasing the sample size is one technique for reducing the standard error of a
Monte Carlo analysis, doing so can be computationally expensive. A better solution is to
employ some technique of variance reduction. These techniques incorporate additional
information about the analysis directly into the estimator. This allows them to make the
Monte Carlo estimator more deterministic, and hence have a lower standard error.

Due to high mathematics required and burden of understanding at this level, we have to
stop this discussion here.

3.2 History of Monte Carlo Method

Physicists at Los Alamos Scientific Laboratory were investigating radiation shielding and
the distance that neutrons would likely travel through various materials. Despite having
most of the necessary data, such as the average distance a neutron would travel in a
substance before it collided with an atomic nucleus or how much energy the neutron was
likely to give off following a collision, the problem could not be solved with analytical
calculations. John von Neumann and Stanislaw Ulam suggested that the problem be solved
by modelling the experiment on a computer using chance. Being secret, their work
required a code name. Von Neumann chose the name "Monte Carlo". The name is a
reference to the Monte Carlo Casino in Monaco where Ulam's uncle would borrow money
to gamble.

Random methods of computation and experimentation (generally considered forms of

stochastic simulation) can be arguably traced back to the earliest pioneers of probability
theory but are more specifically traced to the pre-electronic computing era. The general
difference usually described about a Monte Carlo form of simulation is that it
systematically "inverts" the typical mode of simulation, treating deterministic problems by
first finding a probabilistic analogy. Previous methods of simulation and statistical
sampling generally did the opposite: using simulation to test a previously understood
deterministic problem. Though examples of an "inverted" approach do exist historically,
they were not considered a general method until the popularity of the Monte Carlo method
spread.

It was only after electronic computers were first built (from 1945 on) that Monte Carlo
methods began to be studied in depth. In the 1950s they were used at Los Alamos for early
work relating to the development of the hydrogen bomb, and became popularized in the
fields of physics, physical chemistry, and operations research. The Rand Corporation and
the U.S. Air Force were two of the major organizations responsible for funding and
disseminating information on Monte Carlo methods during this time, and they began to
find a wide application in many different fields.
Uses of Monte Carlo methods require large amounts of random numbers, and it was their
use that spurred the development of pseudorandom number generators, which were far
quicker to use than the tables of random numbers which had been previously used for
statistical sampling.

3.4 Applications of Monte Carlo Methods

As stated above, Monte Carlo simulation methods are especially useful for modelling
phenomena with significant uncertainty in inputs and in studying systems with a large
number of coupled degrees of freedom. Areas of application include:

a. Physical sciences:
Monte Carlo methods are very important in computational physics, physical chemistry, and
related applied fields, and have diverse applications from complicated quantum
calculations to designing heat shields and aerodynamic forms. The Monte Carlo method is
widely used in statistical physics, particularly Monte Carlo molecular modelling as an
alternative for computational molecular dynamics as well as to compute statistical field
theories of simple particle and polymer models. In experimental particle physics, these
methods are used for designing detectors, understanding their behaviour and comparing
experimental data to theory, or on vastly large scale of the galaxy modelling.

Monte Carlo methods are also used in the models that form the basis of modern weather
forecasting operations.

b. Engineering
Monte Carlo methods are widely used in engineering for sensitivity analysis and
quantitative probabilistic analysis in process design. The need arises from the interactive,
co-linear and non-linear behaviour of typical process simulations. For example,
in microelectronics engineering, Monte Carlo methods are applied to analyze
correlated and uncorrelated variations in analog and digital integrated circuits. This
enables designers to estimate realistic 3 sigma corners and effectively optimise
circuit yields.
in geostatistics and geometallurgy, Monte Carlo methods strengthen the design of
mineral processing flow sheets and contribute to quantitative risk analysis.

c. Visual Designs
Monte Carlo methods have also proven efficient in solving coupled integral differential
equations of radiation fields and energy transport, and thus these methods have been used
in global illumination computations which produce photorealistic images of virtual 3D
models, with applications in video games, architecture, design and computer generated
films.
 d. Finance and business
Monte Carlo methods in finance are often used to calculate the value of companies, to
evaluate investments in projects at a business unit or corporate level, or to evaluate
financial derivatives. Monte Carlo methods used in these cases allow the construction of
stochastic or probabilistic financial models as opposed to the traditional static and
deterministic models, thereby enhancing the treatment of uncertainty in the calculation.

e. Telecommunications
When planning a wireless network, design must be proved to work for a wide variety of
scenarios that depend mainly on the number of users, their locations and the services they
want to use. Monte Carlo methods are typically used to generate these users and their
states. The network performance is then evaluated and, if results are not satisfactory, the
network design goes through an optimization process.

f. Games
Monte Carlo methods have recently been applied in game playing related artificial
intelligence theory. Most notably the game of Battleship have seen remarkably successful
Monte Carlo algorithm based computer players. One of the main problems that this
approach has in game playing is that it sometimes misses an isolated, very good move.
These approaches are often strong strategically but weak tactically, as tactical decisions
tend to rely on a small number of crucial moves which are easily missed by the randomly
searching Monte Carlo algorithm.

The opposite of Monte Carlo simulation might be considered deterministic modelling

using single- best

best case, worst case, and most likely case), and the results recorded for each so-called
scenario.
By contrast, Monte Carlo simulation considers random sampling of probability distribution
functions as model inputs to produce hundreds or thousands of possible outcomes instead
of a few discrete scenarios. The results provide probabilities of different outcomes
occurring.
For example, a comparison of a spreadsheet cost construction model run using traditional

probability distributions shows that the Monte Carlo analysis has a narrower range than

scenarios.

A randomized algorithm or probabilistic algorithm is an algorithm which employs a

degree of randomness as part of its logic. The algorithm typically uses uniformly
distributed random bits as an auxiliary input to guide its behaviour, in the hope of
achieving good performance in the "average case" over all possible choices of random bits.
Formally, the algorithm's performance will be a random variable determined by the
random bits; thus either the running time, or the output (or both) are random variables
In common practice, randomized algorithms are approximated using a pseudorandom
number generator in place of a true source of random bits; such an implementation may
deviate from the expected theoretical behaviour.

g. Uses in mathematics
In general, Monte Carlo methods are used in mathematics to solve various problems by
generating suitable random numbers and observing that fraction of the numbers which
obeys some property or properties. The method is useful for obtaining numerical solutions
to problems which are too complicated to solve analytically. The most common application
of the Monte Carlo method in mathematics are:

i. Integration
Deterministic methods of numerical integration usually operate by taking a number of
evenly spaced samples from a function. In general, this works very well for functions of
one variable. However, for functions of vectors, deterministic quadrature methods can be
very inefficient. To numerically integrate a function of a two-dimensional vector, equally
spaced grid points over a two-dimensional surface are required. For instance a 10x10 grid
requires 100 points. If the vector has 100 dimensions, the same spacing on the grid would
require 10100 points which is far too many to be computed. But 100 dimensions is by no
means unusual, since in many physical problems, a "dimension" is equivalent to a degree
of freedom.
Monte Carlo methods provide a way out of this exponential time-increase. As long as the
function in question is reasonably well-behaved, it can be estimated by randomly selecting
points in 100-dimensional space, and taking some kind of average of the function values at
these points. By the law of large numbers, this method will display convergence (i.e.
quadrupling the number of sampled points will halve the error, regardless of the number of
dimensions).

ii. Optimization
Most Monte Carlo optimization methods are based on random walks. The program will
move around a marker in multi-dimensional space, tending to move in directions which
lead to a lower function, but sometimes moving against the gradient.

Another popular application for random numbers in numerical simulation is in numerical

optimization (choosing the best element from some set of available alternatives). These
problems use functions of some often large-dimensional vector that are to be minimized
(or maximized). Many problems can be phrased in this way: for example a computer chess
program could be seen as trying to find the optimal set of, say, 10 moves which produces
the best evaluation function at the end. The travelling salesman problem is another
optimization problem. There are also applications to engineering design, such as design
optimization.
 iii. Inverse problems
Probabilistic formulation of inverse problems leads to the definition of a probability
distribution in the space models. This probability distribution combines a priori (prior
knowledge about a population, rather than that estimated by recent observation)
information with new information obtained by measuring some observable parameters
(data). As, in the general case, the theory linking data with model parameters is nonlinear,
the aposteriori probability in the model space may not be easy to describe (it may be
multimodal, some moments may not be defined, etc.).

When analyzing an inverse problem, obtaining a maximum likelihood model is usually not
sufficient, as we normally also wish to have information on the resolution power of the
data. In the general case we may have a large number of model parameters, and an
inspection of the marginal probability densities of interest may be impractical, or even
useless. But it is possible to pseudorandomly generate a large collection of models
according to the posterior probability distribution and to analyze and display the models in
such a way that information on the relative likelihoods of model properties is conveyed to
the spectator. This can be accomplished by means of an efficient Monte Carlo method,
even in cases where no explicit formula for the a priori distribution is available.

h. Computational mathematics
Monte Carlo methods are useful in many areas of computational mathematics, where a
lucky choice can find the correct result. A classic example is Rabin's algorithm for
primality testing (algorithm which determines whether a given number is prime). It states
that for any n which is not prime, a random x has at least a 75% chance of proving that n is
not prime. Hence, if n is not prime, but x says that it might be, we have observed at most a
1-in-4 event. If 10 different random x say that "n is probably prime" when it is not, we
have observed a one-in-a-million event. In general a Monte Carlo algorithm of this kind
produces one correct answer with a guarantee that n is composite, and x proves it so, but
another one without, but with a guarantee of not getting this answer when it is wrong too
often; in this case at most 25% of the time.
Remark:
In physics, two systems are coupled if they are interacting with each other. Of special
interest is the coupling of two (or more) vibratory systems (e.g. pendula or resonant
circuits) by means of springs or magnetic fields, etc. Characteristic for a coupled
oscillation is the effect of beat.

4.0 4.0 Self-Assessment Exercise(s)

Answer the following questions:
1. How is Monte Carlo method different in approach from the typical mode of
simulation, in deterministic problems?
2. How is Monte Carlo method used in Engineering and Mathematics?
 5.0 Conclusion
Monte Carlo methods, relies on repeated computation of random or pseudo-random numbers.
These methods are most suited to computations by a computer and tend to be used when it is
unfeasible or impossible to compute an exact result with a deterministic algorithm (i.e. an
algorithm whose behaviour can be completely predicted from the input)

6.0 Summary
In this unit we discussed the following:
The algorithm of Monte Carlo method
The history of Monte Carlo method which spurred the development of pseudorandom
number generator
The application of Monte Carlo methods in areas such as physical sciences,
Engineering, Finance and Business, telecommunications, Games, Mathematics, etc.

7.0 Further Readings

Devore, J. L. (2018). Probability and statistics for engineering and the sciences. Toronto,
Ontario: Nelson.
Georgii, H. (2013). Stochastics: Introduction to probability and statistics. Berlin: De
Gruyter.
Giri, N. C. (2019). Introduction to probability and statistics. London: Routledge.
Johnson, R. A., Miller, I., & Freund, J. E. (2019). Miller & Freunds probability and
statistics for engineers. Boston: Pearson Education.
Laha, R. G., & Rohatgi, V. K. (2020). Probability theory. Mineola, NY: Dover
Publications.
Mathai, A. M., & Haubold, H. J. (2018). Probability and statistics: A course for
physicists and engineers. Boston: De Gruyter.
Pishro-Nik, H. (2014). Introduction to probability, statistics, and random processes. Blue
Bell, PA: Kappa Research, LLC.
Spiegel, M. R., Schiller, J. J., & Srinivasan, R. A. (2013). Schaums outline of probability
and statistics. New York: McGraw-Hill.