PART 14

10

FINANCIAL MODELING

Golden Rules of
Financial Modeling

10 Golden Rules of Financial Modeling

1.

Start with a conceptional model.

WHAT

Influence
Diagrams

10 Golden Rules of Financial Modeling

1.

Start with a conceptional model.

2.

Document as you build.

1
2
3
4
5

Variables have
meaningful names
No structured
documentation
No variables with
defined roles
Invisible model
structure
Little support
for modularity

6
7
8
9
10

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 interface

1
2
3
4
5

Variables have
meaningful names
Each variable is a
structured object
No variables with
defined roles
Invisible model
structure
Little support
for modularity

6
7
8
9
10

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 interface

1
2
3
4
5

Variables have
meaningful names
Each variable is a
structured object
No variables with
defined roles
Invisible model
structure
Little support
for modularity

6
7
8
9
10

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 interface

10 Golden Rules of Financial Modeling

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.

Dont 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.

Dont put assumptions in future periods.

5.

Immediately test each calculation.

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)

10 Golden Rules of Financial Modeling

1.

Start with a conceptional model.

2.

Document as you build.

3.

Make assumptions explicit.

4.

Dont 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.

Dont 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.

Dont 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.

A theory should be
as simple as possible,
but no simpler.
Albert Einstein

10 Golden Rules of Financial Modeling

1.

Start with a conceptional model.

2.

Document as you build.

3.

Make assumptions explicit.

4.

Dont 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.

Dont 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.

Dont trust your model too much.

Essentially, all
models are wrong,
but some are useful.
George E. P. Box