Why Web 2.0 will find Financial modeling next
A recent piece in the National Journal by Tankersley and Hirsh, “Neo-Voodoo Economics”, encouraging American’s to think more boldly about new growth and markets, rather than simplistic rethreads, prompted me to think about a few new opportunities in this space. A plethora of industries have been radically transformed and reconfigured by the emergence of new business models made possible by web 2.0. Netizens (a term commonly used to describe people actively involved in online communities) have rocked the foundations, processes and relationships (and wallets) upon which they were built over the past 25 years – learning, working, media and everything in between. Inroads have begun into even the most sacred of sectors – such as religion, politics, property and professional services.
However, often these seismic transformations are as subtle, as they are gradual. A compelling case could be mounted that the financial modeling industry – part of the 700,000 firms in the $1 trillion+ professional services industry – may be next to be transformed by Web 2.0.
Nearly three years after Derman and Wilmott’s penned the “Financial Modelers’ Manifesto”, one may have hoped that some major practical new thinking might be injected to help systematically improve the quality of the processes, practices, skills, governance and awareness of the importance of financial modeling worldwide. The Hippocratic Oath – which justifiably encouraged quantitative finance professionals to not focus on the absolute correct model, but the art of choosing a suitable one and understanding its limitations – had quietly hoped that the message might permeate beyond the finance community. Yet unfortunately it didn’t. Arguments continue around whether financial theory should emulate physics or discover its own elegant, universal laws. A few investment bankers continue to give the entire industry a bad reputation (c.f. mispricing Linkedin IPO). A recent global report surveying over 300 financial modelers found that many of the same old problems persist. We should have known an Oath alone is too narrow an instrument to help systematically improve an entire industry.
The next Web 2.0 frontier is the financial modeling industry and will be profound and largely driven by “TIC” principles – transparency, independence and collaboration. Tremendous opportunity exists for the financial modeling industry, and “numbers” communities more generally, to embrace new markets and knowledge-sharing mechanisms.
Transparency – Transparent and realistic assumptions, inputs, outputs, risk, organisational behaviour and stakeholder’s expectations are crucial to building financial models with robustness and integrity. Some of the world’s leading freelancer marketplaces – such as Elance, Guru, V-Worker, ODesk – have found truly innovative, collaborative ways to connect and organise their communities in a centralised and efficient way (including some limited financial modeling). Such business models are certainly not a panacea, but they are a healthy start in achieving such transparency. With 500+ million Microsoft Excel users alone – one would hope for the development of dedicated, deeper and more liquid platforms to serve the unique needs of the financial modeling industry.
Independence – Currently, there is no decentralised online mechanism for the independent review of financial models. Could internal audit-like standards or external third party “sensibility” checks be useful? Could there be value in recycle high quality financial models? Since it would be naevi to assume that most financial models are “clean and simple” – further thinking is needed around systems and governance frameworks geared towards independence and accountability.
The world’s 500+ million Microsoft Excel users are fortunate to have extensive online resources for Q&A, tips, training, product networks – lead by Excel Tip, Mr Excel, Excel Forum, Excel Banter, OZ Grid and Excel Guru. There forums can be key thought-leaders that help inject valuable knowledge and independence into their communities (one such example, The Excel Magician). However, plentiful opportunities still exist to connect fragmented information sources, knowledge, rationalise training providers and improve widespread adoption of financial modeling standards. Other powerful financial modeling tools – including Eviews, Mathematica, Matlab – present new opportunities to improve the maturity of resource sharing and interconnected communities.
Independence can also help bring a higher quality financial modeling standard to a much broader global audience – not just confined to finance. Financial models are entrenched and used powerfully throughout professional services, engineering, infrastructure, operations, debt and equity markets, supply chain, data management, strategy and operational processes. Superiority financial modelers possess a multitude of great qualities – a mixture of technical, operational, commercial and social understanding – not merely short-cut keys and pivot tables. One problem is that many people don’t use financial models to their full capacity because they simply cannot. The gap between the “knows” and “don’t knows” creates opportunities for more accessible education programs and tapping a global community in a decentralised way to educate and improve financial modeling quality.
Collaboration – Crowdsourcing may present itself as a viable business model alternative. Financial modeling involves creativity, deep analysis, deep analysis and process – not too dissimilar to the design industry (e.g. 99 Designs), data prediction (e.g. Kaggle), data scientists (e.g. Tunedit), advertising agencies (e.g. GeniusRocket), slogan development (e.g. Get-a-slogan), mobile testing and market research (e.g. Mob4Hire) and basic human tasks (e.g. Amazon Mechanical Turk). Facebook even managed to crowdsource the translation of its French, Spanish and German sites with the help of 10,000 volunteers worldwide in less than 4 weeks. Despite persuasive arguments against the “commoditisation” of industries – perhaps there are equally justifiable benefits to the democratising of opportunities and making knowledge more accessible?
In summary, further thought leadership in the financial modeling industry is required to tackels such issues and drive innovation. Web 2.0 will certainly not be an elixir to all financial modeling communities woes – but at least it’s a healthy start. People, systems, processes and technologies will be key to fulfilling the Hippocratic Oaths pledges. Peter Senge once retorted: “Change is the essence of life. Be willing to surrender what you are for what you could become”.