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Monte Carlo criticisms -- any rebuttal?

Submitted by webapalooza on 10 July 2009 - 2:19pm

Just wondering what the makers of ESPlanner have to say about these criticisms of Monte Carlo modeling?

http://www.i-orp.com/modeldescription/MonteCarlo.html

http://www56.homepage.villanova.edu/david.nawrocki/Finance%20and%20Monte...

Thanks...

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Submitted by Laurence Kotlikoff on 10 July 2009 - 4:26pm.
1

Our Monte Carlo analysis takes full account of the fact that earning higher or lower returns will affect your taxes. Our dynamic programming routine figures out precisely what taxes your household will pay at each future date depending on (as a function of) the regular and retirement account assets you show up with at that date.

Our Monte Carlo analysis assumes jointly, not independently, distributed asset returns.

Submitted by Dick Munroe on 26 July 2009 - 6:54pm.
2

First a snippy comment: the first link you gave us is in desperate need of a proof reader and editor.

Second, a comparison of the "here's what monte carlo has to take into account" list with the inputs of ESPlanner matches up fairly precisely. I'm pretty sure we hit everything on this list and a bunch more.

Any tool improperly used will hurt the user of that tool. Doesn't matter if its a hammer or an economic simulation package. The important thing to note is that we can't keep you from hurting yourself. It's your job to know enough to realize the limitations of the technology. We don't hide those limitations or claim that the software's predictions accurately represent the future. If you dig through this forum you'll find any amount of cautionary advice WRT ESPlanner results and predictions most of which have been made by the various employees of ESP, Inc.; but we can't stop you from making optimistic assumptions or entering bogus data or otherwise misusing the tool.

Having said that, if the assumptions you've made about the future are correct, e.g., rate of return, inflation, etc. then ESPlanner's predictions should be reasonably close to what will happen.

So use the hammer wisely, otherwise you will wind up with a painful thumb.

Best,

Dick Munroe

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