Thursday, September 4th, 2008
finding a valid approach

As we consider how to make decisions (regarding investments or anything else), we must ask whether the model of the world that we are using is valid.  But what does it mean to be “valid”?  A linguistic journey yields a variety of definitions of the word, from the legal (“a valid title”) to expressions of strength and robust health — actually the most common usage a hundred years ago and now rarely heard.You can be thankful that the online version of the OED is overpriced, or I’d probably throw some citations at you too.

Some other words and phrases that come up:

You’ll note that there are several different concepts here, including those focused on correctness and those indicating usefulness in influencing others.  This exercise in semantic parsing was inspired by a webinar presented by Celent to discuss its recent report on model validation.Celent | This is the press release announcing the report, which is available to Celent members.

While I might take issue with some of Celent’s categorizations or visuals,Speaking of parsing, as a consultant doing similar work, it’s pretty much a given that I would find fault with exactly where someone else drew the lines of demarcation. I agree wholeheartedly with its bottom line:  An investment firm needs to validate the models that form the core of its operations and its decision-making processes.  How it should be done will vary based upon the nature of the firm and the models it relies upon.the research puzzle | As I indicated in this earlier post, for many firms it gets down to dealing with spreadsheets created by individual users. As indicated in the last slide of the Celent presentation, a holistic approach is needed, one that has institutional support and which features regular looks at the structures and assumptions of the models by “validators” that are properly positioned in the organization.

Expressed in one sentence, it sounds pretty simple, but given the chaotic nature of model creation in living, breathing, and changing organizations, it is anything but simple (and that’s without the possibility that everyone sits around debating what “valid” really means).  However, whether the process is home-grown or is guided by a consultant of one kind or another, it is absolutely essential that the leaders of firms put it at the top of their to-do lists.