10 golden rules of financial modeling
TRANSCRIPT
Golden Rules of Financial Modeling10
PART 14 FINANCIAL MODELING
1. Start with a conceptional model.
10 Golden Rules of Financial Modeling
WHAT
Influence Diagrams
1. Start with a conceptional model.
2. Document as you build.
10 Golden Rules of Financial Modeling
21Variables have
meaningful names
No structured documentation
Formulas work with cells not tables
Changing dimensions is
No built-in treatment of uncertainty
Minimal support for sensitivity analysis
No separation of end-user interface10
9876
No variables with defined roles
Invisible model structure
Little support for modularity 5
43
21Variables have
meaningful namesFormulas work with cells not tables
Changing dimensions is
No built-in treatment of uncertainty
Minimal support for sensitivity analysis
No separation of end-user interface10
9876
No variables with defined roles
Invisible model structure
Little support for modularity 5
43
Each variable is a structured object
21Variables have
meaningful namesFormulas work with cells not tables
Changing dimensions is
No built-in treatment of uncertainty
Minimal support for sensitivity analysis
No separation of end-user interface10
9876
No variables with defined roles
Invisible model structure
Little support for modularity 5
43
Each variable is a structured object
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
10 Golden Rules of Financial Modeling
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
4. Don’t put assumptions in future periods.
10 Golden Rules of Financial Modeling
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
4. Don’t put assumptions in future periods.
5. Immediately test each calculation.
10 Golden Rules of Financial Modeling
Test as you build
f(x)
f(x)f(x)f(x)
f(x)
f(x)f(x)f(x)
f(x)
f(x)f(x)f(x)
f(x) f(x)
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
4. Don’t put assumptions in future periods.
5. Immediately test each calculation.
6. Add detail gradually.
10 Golden Rules of Financial Modeling
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
4. Don’t put assumptions in future periods.
5. Immediately test each calculation.
6. Add detail gradually.
7. Let sensitivity analysis guide you.
10 Golden Rules of Financial Modeling
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
4. Don’t put assumptions in future periods.
5. Immediately test each calculation.
6. Add detail gradually.
7. Let sensitivity analysis guide you.
8. Aim for clarity and simplicity.
10 Golden Rules of Financial Modeling
A theory should be as simple as possible, but no simpler.”“
—Albert Einstein
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
4. Don’t put assumptions in future periods.
5. Immediately test each calculation.
6. Add detail gradually.
7. Let sensitivity analysis guide you.
8. Aim for clarity and simplicity.
9. Embrace unexpected behavior.
10 Golden Rules of Financial Modeling
1. Start with a conceptional model.
2. Document as you build.
3. Make assumptions explicit.
4. Don’t put assumptions in future periods.
5. Immediately test each calculation.
6. Add detail gradually.
7. Let sensitivity analysis guide you.
8. Aim for clarity and simplicity.
9. Embrace unexpected behavior.
10. Don’t trust your model … too much.
10 Golden Rules of Financial Modeling
Essentially, all models are wrong, but some are useful.”“
—George E. P. Box