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Software Development Practices Applied to Financial Modeling

The current state of the economy and its financial crisis has required organizations to put additional structure and scrutiny to financial model risk management.  There is increased stipulation for rigor and accountability from executive management, audit, and external agencies when it comes to the utilization of financial models guiding or influencing business decisions.

Are you thinking what’s a financial model?  Well, they are approximations of a complex real-world process…hmm that sounds rather academic.  Basically, models are used to reduce complexity using really really sophisticated mathematical and statistical calculations to estimate something or predict an outcome.

As it turns out, in practice, financial modeling is a lot like software development, unless you are chatting with a financial modeler and then they are nothing alike ;).  Models incorporate lots of functional features, data extraction, data transformation, calculations, and output in various formats.  Further, although there are modeling specific development tools and environments, these often have limited performance when scaling up for multi-user scenarios so models are frequently implemented in SAS or C++.  Yeah, that sounds very similar to software development to me.

So what is the big difference in financial modeling vs. software development?  The resources.  People that are typically engaged in financial modeling are not formally (or often even informally) trained in software development, they are economists and mathematicians and in a few cases I have experienced physicists.  Organizationally they are normally outside of the IT area and are not subject to the same IT general controls. 

I am just beginning to help a client use the process we created for development of small apps outside of IT (see http://www.upmentors.com/144-More-On-the-Process-for-Development-Outside-of-the-IT-Area) and apply it to the financial modeling area along with all the necessary tweaks to fit that specific type of domain.  I will continue to write about how it is developing and the path we take to get to our first release…

Joshua Barnes

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