The power of judgment: Your financial modelling job is safe
First came the calculators, and they hired more people.
Then came the spreadsheets, and they hired more people.
The robots have arrived, and again, they will hire more people.
The use of AI in financial modelling
Will AI replace the need for humans to create financial models? I get asked this question
repeatedly.
Professor Ajay Agrawal from the University of Toronto is a leading expert in artificial intelligence.
He says that while AI has become excellent at “prediction,” it is not yet capable of “judgment.”
Earlier this week, I attended his talk at the annual CFA Institute conference in Chicago. He said
that judgment remains a uniquely human capability, involving the evaluation of outcomes based
on preferences, values, and context.
Agrawal said, “Only humans have judgment. Machines do not. This is central to the new division
of labor.”
He shared an analogy from the field of accounting. Prior to the development of spreadsheets,
accountants spent most of their time manually adding up numbers. With the introduction of
spreadsheets, this did not lead to a reduction in accountants. Rather, the role of accountants
evolved so that they could spend much more time on higher-value tasks which require
judgment.
Why judgment is relevant to financial modelling
As a professional discipline, financial modeling is largely about judgment. AI tools will eventually
be able to expedite the creation of formulas, however, financial modeling will always require
human involvement because so much of financial modeling involves asking the right questions
and making the right decisions with respect to the forecast.
AI will quickly make other technical skills redundant; it will reduce the need for human
programmers and data scientists. A robot can analyze millions of data points and generate
insights and visualizations much more quickly than a human could ever perform the work.
However, financial modeling is about judgment and the process of a person becoming very
insightful about a company or project.
Financial modeling is not simply about the end result. The process of creating a financial model
enables the builder of the model to generate deep insights and to present strong
recommendations to a leadership team.
The need for human understanding
In most organisations, senior executives are not prepared to make important decisions based
entirely on recommendations from AI. These executives expect that a person fully understands
the nuances of each project. The best way for a person to truly understand any opportunity is to
create a financial model to learn about and evaluate the opportunity.
For these reasons, it will continue to be extremely important for humans to have the skills to
build best-in-class financial models.
Eventually, AI will be able to speed up the process of building a financial model. However, a
human will still need to understand every concept and calculation within the model.
Only those people who can truly design, construct, present, and review financial models will be
able to create the confidence needed by senior executives to make important financial
decisions
Take your financial modelling skills to the next level
Strengthen financial modelling skills with the Advanced Financial Modeler (AFM) Accreditation Program, offered by the Financial Modeling Institute in collaboration with CFA Society Australia.
Exclusive CFA Society Australia member offer:
20% off AFM’s standard price
Select CFA Australia and enter your CFA ID number when registering here: https://fminstitute.com/afm-for-cfa/
Non-member offer:
10% off AFM’s standard price
Use code COR-AFM-10-CFA-A-10 at checkout here: https://fminstitute.com/afm/
Author: Ian Schnoor, Executive Director, Financial Modelling Institute
