So, two of the most prominent and respected professors of finance in the world got it wrong! There are several interesting aspects to the Reinhart and Rogoff spreadsheet error saga and many commentators have jumped in to criticise their work now that we know they omitted out five countries. Perhaps the one thing that has not been said is that they had the good grace, open mindedness and humility to send their data to a graduate student that they had never met and wasn’t even a student at either of their universities. Professors do get it wrong, as do all human beings, but good ones are open to analysis and criticisms from others.
On Friday 9th May, professors Reinhart and Rogoff announced they had corrected the omission errors on the financial model that urged goverment to stay below a 90% indebtment level for fear of falling off a fiscal and growth cliff. It was this research that led many countries including Greece and the UK to impose draconian cuts in spending. The error was spotted by a graduate student at the University of Massachusettes Amherst who had requested their spreadsheet to resimulate the model.
Commented on the Reinhart and Rogoff affair, Bill Connolly points out in Forbes magazine
“Every spreadsheet contains an error.”
A few weeks ago I was preparing an interview for the CEO of one of the most important European companies. I had prepared a two page document with a short introduction and a list of questions. I carefully read it through several times, but just to play on the safe side I asked a young intern if she would proof read it for me « just in case. » She found no less than 4 typing errors including one in the very first line. So much for my precision ! If every spreadsheet has an error, so does every word document. Of course, half of the Western world has not based their financial policies on the basis of anything I have written unlike Ms. Reinhart and Mr. Rogoff.
Professors getting it wrong
So professors don’t always get it right. The famous Yale professor of economics, Irving Fisher once stated confidently that stock prices in the USA had “reached a permanently high plateau.” This claim was made in early October 1929 just tend days before the bottom fell out of the Wall Street Stock Exchange. They would not reach the same levels again (inflation adjusted) until 1954.
This brings us back to the famous saying from another economist, J.K. Galbraith that:
“The only function of economic forecasting is to make astrology look respectable.”
Identifying future talent
Predicting future talent is not much easier either. One of Albert Einstein’s now long forgotten professors was reputed to have said that the young Austrian would « never amount to very much!»
Similarly, the Paul McCartney recounts that he met fellow Beatle George Harrison at school and that both of them got extremely bad marks (grades) during their music lessons. Think about that for a second. Back in the 1950s one music teacher in Liverpool had half of the world’s most successful group in his class…and he missed it !
And while we are on the subject of schools, have you ever heard of L. C. Humes High School located in Memphis, Tennessee? Probably not. However, you may have heard of one of its pupils who was refused by its Glee Club on the basis that he wasn’t good enough even to sing….in the choir. His name was Elvis Presley. Apparently, despite that rebuff he went on to sell quite a few records. Well, 300 million or so.
Companies getting it wrong
Errors of this nature are not limited to academic spheres. Companies too can and do get it spectaculary wrong. In 1933, Coca Cola had the opportunity to buy a near bankrupt soft drinks company for one dollar. They refused the offer on the basis that the company had little to offer to their own businesS. The name of that rival ? Pepsi !
IBM dug their own grave in the early 1980s by outsourcing work on operating systems to a little known company named Microsoft. Around the same time, General Electric found it was unable to meet the growing demand for microwave ovens and choose a medium sized Korean firm to help them. That company became the giant we know as Samsung today.
These errors of judgement are all based on our inability to predict the future.
Renihart’s and Rogoff’s error was omitting data that they had.
Even this though can be done by the smartest people in the room. NASA would probably rate as the organisation with the highest IQ per capita ratio in the world. They were therefore somewhat surpised when despite all their careful planning, the unmanned Mars orbiter crashed and burned into the Red Planet in 1999. They looked into the sophisticated mathematical models they had been using and found that they were all quite sound. There was just one slight problem. One part of the team had based their calculations using miles and the other part had used kilometers. Shame !
Edward Weiler, NASA’s Associate Administrator for Space Science brushed off criticism saying :
« People sometimes make errors. »
Fortunately, most of us never get the chance to make a $125 million mistake. If you have just flunked your statistics exam, that might help you put things into perspective.
Getting it wrong but carrying on
So, we all get it wrong sometimes and Conrad Hilton was fond of saying that the real mark of successful people was that they made lots of mistakes but keep going nevertheless. The two professors seem to have done just that.
In fact, this error came to light because the two professors were sufficiently open minded to send the data they had spent time collecting to an unknown graduate student. This should be lauded. If you want proof of just how intelligent they are, you have it right there.
See also :
13 is an unlucky number in many cultures. If you are of the superstitious disposition, then 2013 may not seem like the best possible year for you. Rather than spending twelve whole months avoiding black cats or trying not to walk under ladders why not accept that you will get you share of bad luck in the coming year. Indeed, it might even be better to take a proactive approach. Go looking for as many failures as possible. This could be the fastest route to success. Ask Michael Jordan.
I am very grateful to one of my international students for sharing this wonderful quote from a New Zealand business woman. It was during a class a fortnight ago and we were discussing entrepreneurship and why only 1% of European business school graduates create their own company immediately upon graduating. One of the reasons, said some of the class members, was the obsession with competitive exams and rankings and thus the overall fear of failing. The quote makes you reassess what exactly “success” and “failure” really are.
I have just finished my classes for the semester in Strategic Management. As I did my fifteen minute wrap up of the course, I announced some interesting news to my students. Just three weeks ago, Michael Porter’s company, the Monitor Group, had declared bankruptcy. It is a rare treat to subdue a group of enthusiastic business students but their stunned silence was fascinating to watch.
I recently completed some research on the management and organisation of British universities, which concluded that despite being full of good intentions (in this case to internationalise their offering) they lacked the management experience and know-how to implement the changes necessary to implement their strategies.
Real World Economics Blog: “This is the only reason that the Reinhart-Rogoff 90 percent debt-to-GDP threshold was ever taken seriously to begin with. The point that I have tried to make in the past, apparently with little success, is that debt is an arbitrary number. It is not something that is relatively fixed, like the age composition of the population or the supply of land.”