Critiques and Misconceptions
“Monte Carlo simulation fails to factor in the frequency of extreme events often seen in the real world.”
Typically this is true, but we’re different. We offer multiple probability models with fattened tails to replicate the extreme volatility occasionally seen in financial markets. The implications are clear: compared to traditional financial planning software, Honest Math produces more realistic simulations.
“Monte Carlo simulation doesn’t consider non-market life events like sudden job loss, etc.”
Honest Math allows users to factor in all kinds of stress tests, from large medical expenses to a sudden drop in income. Users have full control over these assumptions.
“Monte Carlo simulation is an arrogant attempt to predict the future.”
Not only is this untrue, but the logic is backward. By using randomness to generate a wide range of outcomes, Monte Carlo simulation illustrates how uncertain the future actually is. If anything, this type of analysis reinforces humility, not arrogance.
“Monte Carlo analysis reassures people that they’ve examined all possible scenarios, giving them false confidence about the future.”
This is one of the more baffling criticisms we come across. It’s hard to see how simulation analysis provides false comfort by demonstrating how random and uncertain long-term investing can be. But there are at least a couple of scenarios in which this could be the case:
The modeling parameters grossly underestimate the potential downsides. This is always a possibility. After all, we live in a world capable of nuclear war, so the downside possibilities are as dark as one can imagine. But let’s be real: if the world does go full Mad Max, your portfolio will be worthless. Instead, your priorities will become clean water, fresh food, and large friends.
The author or messenger of the analysis did a poor job of explaining the appropriate takeaways. Perhaps by assigning “probabilities” to certain outcomes, for example, which we deem wildly inappropriate.
“Monte Carlo analysis produces results that are unintuitive, historically unprecedented, or seemingly impossible.”
Yes, but this is a feature, not a bug. We don’t enjoy a multi-dimensional existence (at least as far as we know). We only get to experience one “true” reality as it unfolds before us. But what happens in real life is only one of many possibilities that could have happened. And it is arrogant to think that things that have not happened in the past are somehow precluded from occurring in the future. The year 2020 is a good example of why it’s ridiculous to limit the range of possibilities to the intuitive.
“Monte Carlo analysis is too complicated for people to understand or use.”
We strongly disagree. Performing and presenting Monte Carlo analysis fairly and thoughtfully can certainly be difficult (after all, we see a lot of folks out there doing it wrong). But that stuff is our job—not yours. The rest—interpreting simulation output, learning from the results, and garnering a deeper appreciation for randomness and uncertainty—is something we think most folks can tackle. We aim to make it as easy as possible.
