Wednesday, May 21, 2008

Model Error (aka your analyst just fucked up)

Model error is one of those euphemisms that sounds almost academic, clinical, maybe even philosophical. You may encounter this term or phenomenon on an engagement at some point and wonder what it means. Fortunately, a concrete example is readily available.

Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, a Financial Times investigation has discovered.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.
Key Takeaway: Don't trust the model your analyst built until you've looked through it yourself, or you expose yourself to the possibility of some serious embarrassment.

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Wednesday, May 21, 2008