Sunday, March 11, 2007

Monte Carlo: public services and risk management

I was pleased to read in Inside Housing that the Housing Corporation is to require the use of Monte Carlo scenario modelling in appraising the capacity of housing associations to deliver development programmes.

The article is not very clear on what Monte Carlo modelling is. Essentially it is a tool for factoring in uncertainties into financial forecasting. Uncertain variables can compound or counteract each other – Monte Carlo techniques factor this in and calculate a most likely outcome as well as a broader range of outcomes. (Apologies to investment analysts and other experts.) The Housing Corporation published a short paper on the use of Monte Carlo models as a risk management technique a couple of years ago. (Be careful googling "models".)

Generally I don’t like regulators telling independent organisations what to do. But I do hope that other funding bodies will encourage organisations, such as FE colleges, to use scenario modelling.

Far too often organisations delivering public services are only asked to forecast a single future - a gross simplification and dangerous too. In a world in uncertainty in terms of inflation rates, interest rates, pay rises and funding levels, it is vital that organisations manage risks – especially when they are being asked to embark on ambitious plan to build (and borrow for) more homes, new campuses, etc etc.

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