Critical Limitations of Monte Carlo Simulations

Monte Carlo simulations have become de rigueur for project risk assessments. There is no doubt the use of monte carlo simulations will provide sound insight into the most likely project outcomes.  

However from a due diligence perspective there are major limitations when it comes to the long tail (low probability) distribution (high consequence) outcomes. Consider the situation where three long tail (say 1 in 1000) issues need to converge to cause total project failure.  Collectively, that’s a 1 in a billion chance.  To test for that, at least 1,000,000,000 trials would need to be completed.  To make that statistically significant there would need to be at 10 to 100 billion trials.