Outlaw Financial Calculators
by
Ross M. Miller
Miller Risk Advisors
www.millerrisk.com
March 21, 2005
Since last December, I have been dedicating so much of
my time to teaching and research (and the last two months almost
exclusively to teaching), that I have only been able to write this
commentary on a sporadic basis. I am about to start a week's worth of
spring break (judging by the attendance in my Friday classes, many of my
students have gotten an early jump on it), which I hope to devote entirely
to research.
While I plan to write more frequently once the semester
ends, there is a recent development that will ensure something new appears
here at least once every two months. Beginning with the May/June 2005
issue, I will be the "op/ed columnist" for Financial
Engineering News and I will reproduce those pieces here as well as
the usual insanity that graces this corner of cyberspace.
While I welcome a larger audience for my ravings, work
that appears in print comes with a price—a lead time of nearly two months
between when I complete a piece and when it is published. Because even
when I am writing every week I have a mental backlog of several pieces
going through my mind at any given time, this is not a timeliness issue
because nothing that appears here comes right off of the top of my head,
even if it might seem that way. (For those fans of my "Adventures in
Retailing" series, a future installment will cover office superstores
and I don't think that FE News will be too happy if I submitted
that piece to them. I have also been toying with a piece about Spalding
Gray, Hunter Thompson, and suicide.)
In finishing the my first piece for FE News a few
days ago, I found it to be more polished and considerably more restrained
than what I usually throw up on the Internet. (We shall see if
professional copyediting catches all the typos.) Hopefully, some as-of-yet
undiscovered conservation law will ensure that my straight-to-the-web
pieces make up for that in rawness, audacity, borderline psychosis, and
punctuation abuse. (My contract calls for me not to defame anyone, but I
would never do that anyway, now would I?)
With that out of the way, it's time to get back to the
usual business of upsetting the easily upset. I must begin with the
admission that I have never used a financial calculator and, if HP and TI
do not follow the recommendations that follow, I never intend to. This
does not, however, prevent me from harboring a visceral disdain for them.
Financial calculators might never have darkened my
doorstep if not for the footnote that leads off Chapter 2 of the textbook
"Financial Management: Theory and Practice 11th Edition," by
Eugene Brigham and Michael Ehrhardt. This was the textbook for the MBA
intro finance course that I taught last semester and which I was told that
"everyone loved." I quote from this beloved textbook:
"[Financial] calculators are relatively inexpensive, and students who
cannot use them run the risk of being deemed obsolete and uncompetitive
before they even graduate." Now you tell me. And to think of
all the time I wasted developing vastly complex analytics for the first
generation of CDOs when a financial calculator could have done everything
for me with the press of a few keys.
This semester I had forgotten about the whole financial
calculator thing and moved on to teach some wonkier courses where I had a
bit more of a comparative advantage and could use butcher diagrams to
illustrate CMO tranches. When grading my students' valiant efforts to
master the intricacies of fixed income securities, I noticed something
interesting. Not wanting to cause the handful of students who had a
serious HP12c Jones to go cold turkey on my watch, I instituted a liberal
policy for which calculators were allowed into the exam, including
financial calculators. (My personal favorite is Casio's two-line fx-300MS
Plus, which can be found on sale for as little as $5 at the office
superstores that will appear in the aforementioned future commentary.
While it suffers from most of the flaws for which I pillory financial
calculators below, all least you can go back and see your numbers after
you enter them and compute sinh-1 directly.)
One of my exams had a question that required finding the
standard bond yield of the 5-year Treasury note in a situation where the
student was supposed to realize that it was trading at par. The majority
of students "got it," entered the note's coupon rate as the
answer, and moved on to the next question. The calculator junkies,
however, fed the problem to their trusty cybernetic extensions and
generally got answers that were seriously incorrect.
To those who questioned me about "what went
wrong" after I had returned their graded exams, I suggested that a
class-action lawsuit against the calculator manufacturers might be in
order. Another student claimed to possess a deviant calculator that would
produce 0.05 when it divided 180 by 360. I hope the bulge-bracket
investment bank where this student will be working after graduation
provides new hires with better computational devices; otherwise, a see a
hot short in the making. (Why anyone would need a calculator to divide 180
by 360 is grist for a column that I might write someday, just not now.)
Last semester, I made clear to my MBA students why the
textbook authors should be drawn and quartered and that financial
calculators should not be used for serious financial work. "You can't
audit a calculator and just try to e-mail it," I told them.
These two fatal flaws of the modern financial calculator
are not inherent to the device, just to the way that they happen to be
implemented. Financial calculators are designed to be "input
only" devices, communicating with the outside world through a small,
one-line LCD display. (I am familiar with the TI scientific calculators
that hook up to PCs via serial or USB cables, but none of my student's
financial calculators appear to have this feature.) What good is it to
calculate something if no one can go back and check it? Even
pencil-and-paper long division has this feature. (I am aware of the
possible trauma that would ensure if I suggested doing long division by
hand in class.) Furthermore, the lack of digital output makes group
collaboration on a calculation impossible. In contrast, the typical
financial spreadsheet is often e-mailed back and forth dozens of times
during its development. (Skeptics will note that this is not always a good
thing.)
It would not be that difficult to create a new breed of
financial calculators that could be superior to PC spreadsheets, but
neither HP nor TI appear to have any inclination in that direction.
Indeed, under the cost-cutting regime of the now-departed Great Fiorina,
the change to HP financial calculators that is most evident from a quick
Googling is the replacement of those nice embossed key symbols with
painted-on ones that rub off.
In writing this I realize that there is a vast
difference of opinion as to the best way to perform financial calculations
and that I was one of the original bashers of spreadsheets. The issues
with spreadsheets that I raised in the first chapter of my out-of-print
book, Computer-Aided Financial Analysis (Addison-Wesley, 1990),
have yet to be adequately addressed. While spreadsheets can be audited
(after a fashion) and are e-mailable (within limits), they are still
facilitate/encourage a huge range of user error. Furthermore, spreadsheets
of any complexity as written by the typical graduate of an elite business
school are as difficult to audit as GE's corporate tax return.
All this said, a good place to start is to outlaw the
purchase, sale, and use of financial calculators. Given that financial
calculators are both dangerous and addictive—right up there with crack,
Afrin, and Starbucks—such a move does not seem too radical. If
legislative efforts fail, I am always happy to be called as an expert
witness in the class-action lawsuit.
Unfortunately, the forces of evil appear to have the
upper hand. Although it does not officially endorse them, the CFA
Institute effectively requires the use of financial calculators for its
exam by prohibiting the use of any calculators except for its two approved
models. One is the classic HP12c (including the deluxe platinum edition,
suitable as a "kiss off" present from a significant other who
resents being ignored during the three-year CFA exam ritual) and the other
is the TI BA-II Plus (including the Professional model) on which CFA®
jumps out at you from the blister pack.
Users of 98-cent calculators from Wal-Mart are
threatened with the following
legalese: "Use of an unauthorized calculator is considered a
violation of CFA Institute rules, regulation and policies, and may result
in a professional conduct investigation with the possibility of sanctions
up to and including suspension from participation in the CFA Program and
voiding of your examination results." While you are at it folks, why
not ban calculators that cannot automatically find the value of an
American option on a dividend-paying stock or price an interest rate cap?
Those looking forward to further acts of wanton
defamation will find my next commentary, "Finance Textbook Rant"
to be most yummy. Cheers.
Copyright 2005 by Miller Risk Advisors. Permission
granted to forward by electronic means and to excerpt or broadcast 250
words or less provided a citation is made to www.millerrisk.com.