Financial Modeling – Explained to a Child
When a CFO is asked what he does on a day-to-day basis, the usual answer is quite simple: “I do financial modeling for companies to help them maximize their ROI thanks to well-calculated decision-making.”
– but not for a 7-year old kid.
Some time ago, Andrew Grigolyunovich, the head of AG Capital, gave his daughter a simple and practical example: knowing that her daughter collects L.O.L dolls, Andrew decided to create a financial model that shows the probability of getting all the dolls using Monte Carlo simulation techniques.
There are just 12 dolls in the series, but you never know which one is inside the ball. At first, this is great fun, but the more dolls you collect, the higher are the chances of getting a duplicate. In addition to that, some dolls are ‘rare’ and ‘ultra rare’ – you have smaller chances to get them.
When creating the model, Andrew showed his daughter that getting 12 different dolls is not so easy. The full series collection requires the purchase of an average of 59 dolls! Even then, the dispersion of the results is so large that there is still a 24% chance that we will not get the full collection even after buying as many as 100 dolls.
If she also invited her friends to collect dolls to exchange them later, the chances are unlikely to increase – Having an ultra-rare doll in the collection makes it very difficult for someone to have a spare one for exchange. The modeling showed that Andrew’s daughter had to get at least 5 friends on average to collect the dolls of this series and keep Andrew’s bill below 500 USD.
At the end of the day, his daughter said:
“You know what, Dad, this just takes too much time! Let’s go buy something else ”.
Of course, there is no certainty that she will not change her mind. But financial modeling helped her realize that collecting all the dolls in a collection is not as easy as it seems. Andrew hopes that the explanation also helped her understand financial modeling and understand how his work helps other people make decisions.
Download the described model here: