Warren Buffett took the stage at the Berkshire Hathaway annual meeting over the weekend and answered questions for more than five hours. As reported in the New York Times, Buffett didn’t have much good to say about those who practice higher math:
“During the boom, the country became too enamored with the idea that the best and brightest could predict the future; too dependent on complicated financial models developed by quant jocks; and too reactive to every uptick or slight drop in the market. It still may be today.
“If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it,” he said. Given that the stress tests for the banking system — developed with complex spreadsheets and using sophisticated formulas predicting the next two years’ worth of earnings and write-downs — are being released this week, it was timely advice.”
His business partner, Charlie Munger, wasn’t any more sanguine:
“Some of the worst business decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you, but it doesn’t. They teach that in business schools because, well, they’ve got to do something.”
Despite a bad year (hey, who didn’t have one?), Buffett remains a God-like figure in investment circles. His words carry weight. At the IIA we must ask: What do these most recent words mean for the practice of analytics? Granted analytics have many, many more uses beyond financial models and, yes, fancy math can obscure faulty assumptions and poor reasoning but is higher math really to blame?
Should we, as Tom Davenport posted yesterday, ask that every manager be more of a quant? Or should we make sure to have some quals (doesn’t sound as good as “quant” does it?) around to ask some “stupid” questions? Should we trumpet the stories of those who use predictive analytics to legitimately outperform their respective markets? If you have one of those to share, please let us see it here.
I think that it is a bit of both. It helps when managers and executives know enough to be able to ask intelligent, probing questions. However, great stories are still the best way to persuade people and help them understand difficult concepts. Math jocks need to be able to use words as well as numbers.
What do you think the long-term impact of Buffet’s words might be? What would you tell Warren to make him think differently about “fancy math?”
