Hi!

And thanks for reading. When I catch up with past work colleagues people reliably ask what I’m working on these days, so I thought I’d give you an update. I mainly have three clients now. First, I’m working with a telecom group inside Google which is working on innovative products which lead to greater abundance in wireless networks. More and more traffic is accessed from mobile devices, and this will hopefully let you watch all the cat videos you want. And boy, you seem to want them. I’m also helping Panasonic spin off a telecom equipment company they’ve incubated and working with a local home builder on analytical tools for deciding whether to green-light a project (and manage its implementation). Those tools have become quite comprehensive and were great fun to build.

Finally, a shout out to Mytonomy, which raised a $7M Series A round using a Brode Group projection!

Hope you’re doing well and we can catch up soon.

Best,

David

Have you ever used a forecasting model where you input actuals and then found that it's hard to get Actuals+Forecast to transition elegantly? I just created a new methodology for handling that. Curious? Contact me for a demo.

The Wall Street Journal Tells Us To Give Up Excel
(Part 2)

For review, recall that the Wall Street Journal wrote about how CFOs were telling their employees to Stop Using Excel and continued with Finance Pros Say You’ll Have to Pry Excel Out of Their Cold, Dead Hands, with both articles raising objections to the use of Excel. Last month’s newsletter covered the main objection regarding data issues. This month I want to address the other issue identified:

1. Excel errors can be terribly costly
• Spreadsheets can cause huge problems. The article mentions the 2012 J.P. Morgan London Whale $6.5B loss.
2. Collaboration Issues
• Excel is not multi-user
• There is software that’s better for a monthly data gathering and planning exercise than “distributing hundreds of Excel spreadsheets to regional and unit leaders.”
3. People want to use Excel for bad reasons
   • Obviously, people feel strongly about Excel, but it’s just because you can futz with it and people feel ownership about something they built
   • People who don’t want to give up Excel in favor of new specialized software are Luddites. And some of them still use calculators (gasp!).

Let’s start today with the idea that spreadsheet errors are expensive, and the poster child for that argument is the London Whale scenario. This has often been reported upon. This analysis describes the problem, but the key information comes from JP Morgan’s report:

“Specifically, after subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR….”

It’s funny. JPM’s report extends to 128 pages, and the sentence quoted above is literally the penultimate sentence out of over 38,000 words. If this was the real problem then the authors should win first prize in the “burying the lede” competition. This should be a real clue that spreadsheets weren’t the problem here.

So, basically, someone coded a formula wrong and nobody caught it because it reduced Value at Risk and thus gave an answer that everyone liked. This isn’t an Excel problem so much as a code review problem. Of course, you have to do your analysis right. I have high confidence in my forecasting models, and that’s in part because we review results repeatedly. If the argument is that you’re a fool to trust Excel, I’d make the more general statement that you’re a fool to trust any computer (or hand) analysis without careful review.

Of course, people make very real and big-money decisions based on Excel analysis. Caveat emptor, of course. But the problem isn’t Excel per se. It’s that any complex analytical process offers opportunities for errors to creep in. JPM could just as well had a commercial system which had a mistake in the VaR calc. But the layer at which the problem happened is certainly not unique to Excel.

In the final analysis, the spreadsheet error played a role in claiming reduced volatility, but certainly isn’t responsible for the scale of the loss, which was done by the equivalent of the classic strategy of doubling your bet each time you lose. The spreadsheet was supposed to raise a red flag about the strategy, and it failed to do so, but the traders themselves were engaging in bad behavior and that was the real source of the problem.

The next objection was that Excel isn’t multi-user and collaborative and that sending hundreds of spreadsheets by mail isn’t a good solution. Um, yeah. First of all, if you want collaborative spreadsheet work, Google Sheets is pretty good. It doesn’t have all the features of Excel, but the sharing, real-time collaboration, and commenting linked to emails is pretty darn effective. I’m a fan for those times when collaboration is key. As to the distributing of spreadsheets, I’ve used Google Sheets for that as well. No emailing. Easy data management. But if you’re working on a problem which needs input from hundreds of people, it’s likely a very structured process and is thus one which packaged software is more likely to solve. You’ll definitely give up the flexibility of Excel, and sometimes that’s worth it.

Finally, the articles say that our desire to mess with spreadsheets and our feeling of ownership of the product is bad. Isn’t this the exact opposite of what the CFO said when he wanted people to spend more time on analysis and less on “manipulating data?” Aren’t we supposed to get into the analysis and structure it and understand the steps? Are we really just supposed to plug data into stuff other people built? Or just call up a tool which has pre-built data flows and pre-built calcs and look up the answer? I think people who write this kind of stuff don’t understand what financial analysts really do. If it’s all automated, you don’t need us. But based on how my phone keeps ringing, Skynet and Alexa haven’t figured out how to do spreadsheets for you yet.

For me, Excel is the canvas on which I paint. I have a feeling that, like so many others, you’ll have to pry Excel from my cold, dead hands.