8. Disadvantages of using financial models

In your examination, if you are asked to identify some of the disadvantages of using financial models, here are some which you could give:

- Some models might be too simple to be of any use

- You can’t account for every possible variable in a financial model.  Banks might model how much money they think people will save or borrow.  But they can’t know the effect that the current financial crisis will actually have on real life behaviour.

- Many variables need to be considered and it is easy to miss things out. This may lead to misleading results.

- Producing an effective model may be time consuming.

- Some situations will need expensive, bespoke software.