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Andrew Waxman
Andrew Waxman
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Spreadsheet Risk – Should We Ban Excel?

Apparent errors in an influential economic study by two Harvard Professors due to an Excel spreadsheet mistake is another reminder of the operational risks inherent in relying upon formulae hidden in obscure, nestled spreadsheets.

Apparent errors in an influential economic study by two Harvard Professors due to an Excel spreadsheet mistake is another reminder of the operational risks inherent in excel and spreadsheets. Andrew Waxman questions whether the time has come to ban the program altogether.

Errors in spreadsheets are fairly routine, be it a homework submission or a complex swap valuation, but how about a mistake in a spreadsheet that led to millions of job losses? Last week we learned that Excel or a spreadsheet error may have changed the findings of an influential economic study published in 2010, "Growth in a Time of Debt" (Reinhart and Rogoff).

The results of the study were used by many politicians and policy makers to justify the setting of austerity measures in Europe post financial crisis. Many job losses occurred in the wake of these fiscal policy prescriptions. If these policies were based on a spreadsheet error, this surely qualifies as the most significant operational risk event of the year to date. With no 2nd amendment to come to its defense, maybe it's time to ban Excel?

So what happened exactly? Two Harvard professors, Carmen Reinhart and Kenneth Rogoff, wrote an influential research paper in 2010 called "Growth In A Time of Debt". The paper, by these two very well known and respected economists, claimed that there was a close correlation between a country's growth rates and a country's debt level where it exceeded 90% of gross domestic product.

Though the professors say they never made the claim that the relationship was a directly causal one, it did not stop others from drawing that conclusion. Indeed, policy makers in Europe and the United States widely cited the study in prescribing austerity measures aimed at bringing down debt levels.

Other economists, however, pouring over the results were unable to recreate the results. Finally, after a research team at the University of Massachusetts re-visited the data and recently published its results (Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff -Herndon, Ash and Polin), it is now clear why that is. According to Herndon, Ash and Polin, Reinhart and Rogoff's key finding, that countries with over 90% debt have negative growth rates, is only obtained when certain important data points are excluded. The lead author, Thomas Herndon noticed the error, according to recent media reports, when he was given the opportunity to review the spreadsheets developed by the authors of the original study when they emailed to him their spreadsheets. When Herndon looked at the number and the spreadsheets, he found that certain countries were excluded from the results because a formula in the spreadsheet did not include certain rows of data.

[Why Didn't Microsoft Add OMS Functionality to Excel?]

The new study specifically obtained the correlation claimed by Rogoff and Reinhart by excluding Australia, Austria, Canada and Denmark. Once this data was included the authors of the new study showed the average growth rate for countries with over 90% debt ratio is actually 2.2%.

So can we say that this spread sheet error led mistakenly to austerity measures that in turn have needlessly led to millions of job losses in Europe and elsewhere? Well of course, there were many economists and policy makers in favor of austerity measures and the importance of maintaining low debt levels well before this paper was published. No lesser a figure than Margaret Thatcher would have been an honorary member of such a group, for example.

There were also other flaws in the Rogoff-Reinhart professors' arguments that were well known that policy makers chose to ignore. When claiming Rogoff-Einhart's study in support of austerity measures, for instance, did the low growth rate precede the high debt level rather than vice-versa?

At the same time, the episode is another reminder of the operational risks inherent in excel and spreadsheets. As we know, firms that spend hundreds of millions of dollars in new technology annually will still have pockets of the firm reliant on formulae hidden in obscure, nestled spreadsheets. Yes, it would be nice to ban Excel from such uses but unfortunately ease of use and flexibility make it strangely addictive.

In this context, firms should continue to apply resources to identifying and ensure close oversight of any spreadsheets that inform the firms' books and records or any other key production data. Furthermore, continued migration from such dependencies should be part of this continuing effort. Economists should do the same.

Andrew Waxman writes on operational risk in capital markets and financial services. Andrew is a consultant in IBM's US financial risk services and compliance group. The views expressed her are those of his own. As an operational risk manager, Andrew has worked at some of the ... View Full Bio
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