I spend a fair amount of time making and running computer models. For the purposes of what I’m going to say it really doesn’t matter what the models are modeling. Kevin’s job involves making and running models too, they are just models of different things. But one thing is true of all models: they are not the same as the thing that they are actually modeling. They contain assumptions and short cuts and the like.

When you work in modeling, every so often you will come across a client who is suspicious of your model and wants to know more. This often leads to awkwardness, because models are like sausages: the more you know about how they are made, the less wholesome they appear. So you get a conversation that goes something like this:

Client: “These two pork sausages are different. They both taste the same, but they look different to me. Explain to me how they are made so that I can understand why they are different.”

Modeler; “OK, if you really want to know…” [and launches into an explanation of the sausage-making process].

Client: “Eeeuuw! You mean to say that you killed and cut up a pig to make these sausages?”

Modeler: “Well, not me personally, but they are pork sausages. That’s what pork is: dead pig.”

Client: “Well I’m not having it. Bring me some pork sausages that don’t contain dead pig instead.”

And it is not use complaining that pork is pork and you can’t make it without killing pigs. The client is always right, and must have what he asks for.

So yeah, I do get into conversations like this sometimes. So does Kevin. So does everyone who runs computer models.

Unfortunately sometimes the person who doesn’t want dead pig in his pork sausage is not the client, but the CEO. And that, I suspect, has a lot to do with how banks manage to get their financial modeling wrong.