Principles of Financial Modelling

CHAPTER 2Using Models in Decision Support

INTRODUCTION

This chapter summarises the main benefits and challenges of using models in decision support. Where significant amounts of money are at stake, or the choice of the most appropriate decision option is important for some other reason, it is often taken as a given that the building of a model would be useful. However, it is important to understand the specific sources of benefits, and the challenges and potential weaknesses of modelling processes. Doing so will help to support a more robust basis for decision-making, and reduce the likelihood that the outputs are misinterpreted, misused, or assumed to apply to a context for which the model was not designed.

BENEFITS OF USING MODELS

This section highlights the key benefits potentially achievable by the use of models.

Providing Numerical Information

A model calculates the possible values of variables that are considered important in the context of the decision at hand. Of course, this information is often of paramount importance, especially when committing resources, budgeting and so on.

Nevertheless, the calculation of the numerical values of key variables is not the only reason to build models; the modelling process often has an important exploratory and insight-generating aspect (see later in this section). In fact, many insights can often be generated early in the overall process, whereas numerical values tend to be of most use later on.

Capturing Influencing Factors ...