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this is my first post! I'm not a mathematician, so please reply in layperson's terms.

I read Douglas Hubbard's excellent book, "How To Measure Anything," in which he describes how to use Monte Carlo simulations to model the likelihood of different event outcomes in Excel.

The formula he uses is $=\text{NORMINV} (\text{RAND()}, \text{mean, (max value - min value)}/3.29)$

However, this formula assumes that outcomes occur in a standard distribution. What if my distribution is not standard?

For example, let's say I'm doing a Monte Carlo to see how much my house might sell for. The max expected value is $\$500,000$ and the min value is $\$400,000$. However, the likeliest outcome is not in the middle, but slightly lower -- $\$430,000$ rather than the mean of $\$450,000$, depending upon how buyers respond to repairs that are needed.

Any idea how I would model this calculation instead? Thanks!

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  • $\begingroup$ One dollar sign is not enough. You must put another one at the end of the expression which you want to be "dollared". $\endgroup$ Sep 25, 2017 at 14:26
  • $\begingroup$ @uniquesolution The numerical values were USD values; I have edited to reflect this. $\endgroup$
    – user284001
    Sep 25, 2017 at 14:31
  • $\begingroup$ @Kevin: because dollar signs are used to indicate MathJax, you need to escape them with a backslash. To write \$400,000 you write backslash dollar 400,000 $\endgroup$ Sep 25, 2017 at 14:32
  • $\begingroup$ @Kevin The currency is clearly irrelevant. $\endgroup$ Sep 25, 2017 at 14:32
  • $\begingroup$ @uniquesolution It does matter in this case, as the OP wasn't trying to replicate Mathjax. $\endgroup$
    – user284001
    Sep 25, 2017 at 14:34

1 Answer 1

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RAND() creates a random number between $0$ and $1$. It represents the value of the cumulative distribution function of your prices. If you have a desired distribution in mind you need to come up with an expression that takes a cdf value and returns the price, so if you are given $0.3$ your respond with the price that will be too high $30\%$ of the time and too low $70\%$ of the time. This is what NORMINV is doing for the normal distribution. There is a discussion of the transformation method for getting your desired distribution in Numerical Recipes, starting at page 288.

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