Risk and uncertainty in development: A critical evaluation of using the Monte Carlo simulation method as a decision tool in real estate development projects

Purpose – The purpose of this paper is to deal with the appropriateness of using the Monte Carlo simulation as a technique to calculate risk in real estate development.Design/methodology/approach – The paper is divided into two interlinked segments. The first segment examines the general definition of risk and Monte Carlo simulation methodology as a tool to estimate risk. The second outlines the appropriateness of using Monte Carlo as a tool to model real estate development, given the lack of data quality and its inability to account for human relationships in the development process.Findings – It is important that the Monte Carlo Simulation model is used as prescriptive model that builds on the original elicitation procedures; produces initial results; allows for detailed sensitivity analysis and then remodels as required. In short, to be fully effective, the Monte Carlo Simulation model needs to be used in a complementary fashion with an understanding of human judgement and decision making.Research limi...

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