A poor tradesman blames his tools

The analysis of Reinhart and Rogoff (both associated with Harvard) in their paper titled "Growth in the time of Debt " (2010) has been questioned following a graduate student's effort to replicate the original result.

The paper claims that sovereign GDP grows at a snail's pace once a country's debt/gdp ratio exceeds a 90% threshold. This was used by international financial organisations as well as U.S presidential candidate Paul Ryan to argue the merits of austerity. Governments have justified their focus on fiscal rebalancing  citing the "credible" evidences of the Reinhart and Rogoff paper.

The current debate about the need and benefits of austerity both within countries (Greece, Italy, France, the UK) as well as within the European Union are probably the most important policy debate in 2013.  It turns out that at the heart of the paper are faulty calculations in an excel spreadsheet. 

We often  come across numerous situation where Excel spreadsheets are used to make  investment decisions. First, Excel was never designed to run huge volume of data or perform extensive multi-time period simulation runs.  These are best done by programming languages such as C,C++, FORTRAN.

However, efficient use of programming languages requires substantial technical and domain experience. Excel remains a good tool for simpler calculations.

In one of our areas of activity, life settlements, we still see extensive use of Excel spread sheets with predictable results. We have seen stress tests and simulations take days to complete. In related context, recently even one of the life expectancy underwriters had to amend mortality tables again because of a problem with their mortality calculations.

At a portfolio level, the risk of life settlements cannot be understood and even less managed using excel spread sheets.