There was a time when building model airplanes was a fun thing to do. It may have been the fumes from the glue, I suppose. I don’t think we thought that an engineless model F-86 Sabre was real.
As discussed a few weeks ago making decisions on wrong or incomplete “facts” leads to disaster. Minor knowledge of how models build and work is helpful.
For example if I build a model for retirement planning I may choose 5% as a long term average investment yield. If I assume inflation of 2%, I may be okay, but not with certainty. It is possible that yield will be inflation plus 3% but difficult.
So the model runs at a 2% spread, 5% and 3% and it shows that savings must be higher or retirement delayed. Knowing how much the difference is becomes useful. Running it at 9% and 7% looks like the same 2% spread but taxation is a serious impediment as yields go up. The model says, “Learn something about tax management.”
Models are would-be worlds. They are accurate under only two conditions.
Good luck with meeting both of those criteria.
The media would have you believe that the future can be known within limits. It cannot. The information is too chaotic for easy prediction. The most we can hope for is a model that identifies the essential problems and identifies their dimensions. By applying the 3Rs of planning, record, review and revise, we can develop skill and better information derived from what was once the future.
Continuous adjustment is the key.
Without an understanding of how the past and present came to be as they are and what other variations may come to be, there is no strong basis for projecting future outcomes.
Think tendencies (meaning) not results.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.