Problems with Excel

23 thoughts
last posted Aug. 26, 2016, 2:18 p.m.

8 earlier thoughts


DMR concludes,

"Excel wasn’t the problem at JP Morgan. There was a reckless culture that thumbed its nose at rules, ignored the guidance of review committees, and tried to sweep things under the rug when they got caught. That would have happened whether the models were written in Excel or Ruby."

I would say this is a misdiagnosis.

Let's look at the specific error under review:

The new model “operated through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another.” The internal Model Review Group identified this problem as well as a few others, but approved the model, while saying that it should be automated and another significant flaw should be fixed.** After the London Whale trade blew up, the Model Review Group discovered that the model had not been automated and found several other errors. Most spectacularly,

“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 . . .”

14 later thoughts