How Many Monte Carlo Simulations Does One Need to Do? II. Lognormal, Binomial, Cauchy, and Exponential Distributions
Authors: Lerche Ian , Mudford Brett S. 
Published: May 2006

This article derives an estimation procedure to evaluate how many Monte Carlo realisations need to be done in order to achieve prescribed accuracies in the estimated mean value and also in the cumulative probabilities of achieving values greater than, or less than, a particular value as the chosen particular value is allowed to vary. In addition, by inverting the argument and asking what the accuracies are that result for a prescribed number of Monte Carlo realisations, one can assess the computer time that would be involved should one choose to carry out the Monte Carlo realisations. The arguments and numerical illustrations are carried though in detail for the four distributions of lognormal, binomial, Cauchy, and exponential. The procedure is valid for any choice of distribution function. The general method given in Lerche and Mudford (2005) is not merely a coincidence owing to the nature of the Gaussian distribution but is of universal validity. This article provides (in the Appendices) the general procedure for obtaining equivalent results for any distribution and shows quantitatively how the procedure operates for the four specific distributions. The methodology is therefore available for any choice of probability distribution function.

Some distributions have more than two parameters that are needed to define precisely the distribution. Estimates of mean value and standard error around the mean only allow determination of two parameters for each distribution. Thus any distribution with more than two parameters has degrees of freedom that either have to be constrained from other information or that are unknown and so can be freely specified. That fluidity in such distributions allows a similar fluidity in the estimates of the number of Monte Carlo realisations needed to achieve prescribed accuracies as well as providing fluidity in the estimates of achievable accuracy for a prescribed number of Monte Carlo realisations. Without some way to control the free parameters in such distributions one will, presumably, always have such dynamic uncertainties.

Even when the free parameters are known precisely, there is still considerable uncertainty in determining the number of Monte Carlo realisations needed to achieve prescribed accuracies, and in the accuracies achievable with a prescribed number of Monte Carol realisations because of the different functional forms of probability distribution that can be invoked from which one chooses the Monte Carlo realisations. Without knowledge of the underlying distribution functions that are appropriate to use for a given problem, presumably the choices one makes for numerical implementation of the basic logic procedure will bias the estimates of achievable accuracy and estimated number of Monte Carlo realisations one should undertake. The cautionary note, which is the main point of this article, and which is exhibited sharply with numerical illustrations, is that one must clearly specify precisely what distributions one is using and precisely what free parameter values one has chosen (and why the choices were made) in assessing the accuracy achievable and the number of Monte Carlo realisations needed with such choices. Without such available information it is not a very useful exercise to undertake Monte Carlo realisations because other investigations, using other distributions and with other values of available free parameters, will arrive at very different conclusions.