Most financial models today are built using spreadsheets. Spreadsheets are relatively inexpensive and most analysts are comfortable with using them. In addition, numerous macros and add-ons are available to enhance spreadsheets (e.g., tools to enable Monte Carlo simulation within a spreadsheet). So it is natural to ask: "Why can't I just use a spreadsheet for my financial models? What are the advantages of using GoldSim?"
Although spreadsheets are very useful for accounting tasks and managing lists of items, they have weaknesses when used for quantitative modeling tasks, such as analyzing and forecasting the performance of a business or investment portfolio. The major weaknesses of spreadsheets for these types of applications, and how GoldSim addresses these issues, are outlined briefly below:
•Complex spreadsheets are generally not transparent and are error-prone. Because of the row and column paradigm used by spreadsheets, the fact that equations are written in terms of cell references, the invisibility of the dependencies between cells, and the lack of a graphical means to documents spreadsheets, most spreadsheet models have a low level of transparency. Not only does this lack of transparency make it difficult for others to understand a model, it makes it difficult to check for errors. As a result, several studies have shown that complex spreadsheets have a very high incidence of errors (e.g., Panko, 2005). GoldSim's interface, which allows you to build hierarchical, graphical representations of your system (in terms of influence diagrams) was specifically designed to facilitate the construction of transparent, well-documented models.
•Spreadsheets cannot represent complex dynamics. In a spreadsheet, you typically deal with dynamics by adding a row (or column) for each timestep (i.e., each day, each quarter, each month) that you want to forecast a value for. In addition to being a very awkward way to represent dynamics, this has a number of serious disadvantages: 1) it is difficult to represent dynamic feedback loops and delays, where a change made to one part of the system has a delayed impact; 2) sudden events (e.g., a deposit or withdrawal, an interest rate change) are difficult to accurately represent; 3) changes in the system's structure with time are hard to represent (e.g., taking out a loan when required), and 4) the length of the timestep cannot be dynamically adjusted during a simulation (e.g., in response to changing conditions). GoldSim is a dynamic simulation program, and representing such complex dynamics is straightforward and easy.
•Spreadsheets cannot represent uncertain and/or stochastic systems. All real-world financial systems have uncertain and stochastic components. Spreadsheets cannot deal with these directly. There are third-party add-ons that enable Monte Carlo simulation in a spreadsheet. However, because GoldSim was specifically designed to simulate such systems, it is able to more accurately represent and model stochastic processes and random events than these third-party add-ons.
•Spreadsheets have no ability to handle dimensions and units. Because spreadsheets deal only in numbers, and cannot represent units, great care must be taken when building models to handle unit conversions. GoldSim understands dimensions and units, carries out automatic unit conversion, and prevents you from constructing dimensionally-inconsistent models.
•Some financial components require relatively complex programming in a spreadsheet. For example, when simulating investments (e.g., a portfolio of stocks), it is typically necessary to treat these as correlated "random walks" with specified drifts (trends) and volatility. Programming this in a spreadsheet can be complex. The GoldSim Financial Module provides a number of specialized elements that are designed to represent common financial components (e.g., funds, investment portfolios, insurance policies, cash flows).
•GoldSim is a powerful and flexible dynamic simulator that can represent processes (e.g., physical processes, business processes) that cannot accurately be represented in a spreadsheet. By combining the basic GoldSim framework with the Financial Module, you can simultaneously model both the complex processes associated with a system (e.g., the movement of material through a mine) and the financial components of the system (e.g., the costs associated with transporting the material).
These and other advantages make GoldSim a powerful and flexible improvement over spreadsheets for building quantitative financial models. In addition, because GoldSim can link seamlessly to spreadsheets, you can still use spreadsheets as databases for inputs and outputs, and even as subroutines for specialized calculations.