Simulation as a Teaching Tool in Finance
17 Pages Posted: 21 Oct 2014 Last revised: 29 Oct 2014
Date Written: October 20, 2014
An excessive use of algebra and stochastic calculus in undergraduate finance courses is an impediment to learning because it shifts our attention from finance to mathematics; and also because, for most of our students, algebra serves to obfuscate rather than to clarify the basic concepts in finance that we are trying to teach. In this paper we demonstrate with examples, particularly on the subject of risk, that finance lectures may be given without algebra by replacing equations on a blackboard with simple interactive simulation computer screens integrated with the lecture.
Keywords: physics envy, Monte Carlo simulation, risky cash flows, valuation, uncertainty, valuation under uncertainty, stochastic algebra, capital budgeting, option pricing, numerical methods, computational statistics, portfolio theory, diversification, portfolio optimization
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