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Outlaw Financial Calculators


Ross M. Miller
Miller Risk Advisors
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