People who have never seen a research analyst or a portfolio manager at work tend to think of us as Wall Street hot shots who make tons of money speculating on different stocks or developing complex derivative strategies that nobody understands. Meanwhile, people who work as research analysts or portfolio managers know that we are mostly sitting in front of computers looking at huge spreadsheets that somebody developed ten years ago and that have since grown ‘organically’ to the point where we have no idea what is going on.
This is why we need the European Spreadsheet Risks Interest Group (yes, that really exists). The EuSpRIG, as it calls itself is concerned with research about the use of spreadsheets in business and the dangers of errors in them. They estimate that more than 90% of spreadsheets contain errors. Because spreadsheets are rarely tested, many of these errors are never discovered. The result is that frequent users of spreadsheets are overconfident about their spreadsheets. Because they rarely look for errors, they don’t find any. And because they don’t find any, they think their spreadsheets are correct. Meanwhile, the truth is that some 50% of spreadsheets used operationally by businesses have material defects.
The results can be costly. One of the fun things to do for an Excel jockey like me is to go through their list of horror stories, where you can find that cannabis company Canopy Growth in 2019 had to restate a quarterly earnings result. Due to a spreadsheet error the company claimed that its adjusted EBITDA loss for the nine months ending 31 December 2018 was $69m when in truth it was almost twice that at $117.5m. The company’s shares dropped some 4% after the news broke. In the UK, drink maker Conviviality had to announce that due to a spreadsheet error, they did not budget for a £30m tax bill that came due. The company went bust anyway shortly thereafter, but when you are already struggling to survive, this is more than embarrassing. It is life-threatening.
Personally, I will always remember the embarrassment caused to Prof. Carmen Reinhart and Ken Rogoff in 2013. During and after the financial crisis their book “This Time is Different” where they claimed that once a nation’s debt/GDP-ratio exceeds 90%, economic growth slows down dramatically, was highly influential. I used it and became worried about excessive debt. And so did policymakers, especially in Germany and the UK, where these results were often used to justify painful austerity measures. Well, turns out the distinguished and influential professors forgot to add up all the lines in their Excel spreadsheet. With all data included no growth slowdown for highly indebted countries was visible.
Today, we know that austerity measures are not only very painful but also not necessary and not helpful to bring down excessive debt. Many economists have changed their views on austerity and excessive debt and so have I. Here is the reason why.
This is why we need more organisation like the EuSpRIG, no matter how nerdy or ridiculous they sound at first. They develop principles for good spreadsheet practice and we all should heed their advice.
And with that in mind, I would like to encourage the foundation of the following risk interest groups:
Procrastinator Risk Interest Group (PRIG): I have already written about the cost to society caused by people who are late to meetings or miss deadlines. See here for a discussion.
Tube Risk Interest Group (TRIG): Education for Londoners and tourists on how to use an Oyster Card and get through the turnstiles at speed without causing traffic jams and thus risking loud tutting.
Cry Babies Risk Interest Group (CryRIG): Analysing the risks of taking babies into the business class of an airplane. The loss of sleep and work opportunities for true business travellers cost the economy billions each year and irritated executives and diplomats make terrible decisions. Remember John Foster Dulles losing Egypt to the Soviets in 1956.
Joachim, I like all your stuff, but it is posts like this that keep me subscribed. I had never heard of the EuSpRIG before today. Excellent stuff! Do you think it's possible to quantify the additional risk caused by computing errors of this nature? (But be careful! You might need a spreadsheet.)
Your Friday posts are very enjoyable (I am catching up on a Saturday).
What you say about spreadsheet errors is also applicable to a lot of design software. The old-fashioned way of checking hard copies does not work very well with software which require lots of inputs. Quite often, you are reduced to sense-checking the outputs to catch errors - this may not work very well for first-of-a-kind scenarios!!