End the Tyranny Of Spreadsheets in Commercial Appraisal

The Financial Times published an article recently, “The Tyranny of Spreadsheets” by Tim Harford. It’s about the unexpected problems that can come up when using a spreadsheet application like Excel or Google Sheets. This is a tool that everyone has access to and has become very handy for all kinds of things other than accounting.

Commercial appraisers certainly embrace spreadsheets. When we first started Realquantum, we found that 82% of people with any property valuation job were relying primarily on spreadsheet software. We found that to be the case with small businesses and with global banks as well.

In the beginning, spreadsheets were made for accounting. The vast array of financial calculations performed by appraisers can all be done in spreadsheets other than complex statistics that need a product such as R. So, spreadsheets have served appraisal well for a long time. Of course, it’s certainly better than the paper ledger books that came first!

Excel and Google Sheets are the “Swiss Army Knife” of financial calculations. They do so much.

Competition Pushes Us to Do More

These days though, competition is fierce. As a result, the shortcomings of the Swiss Army Knife have become a problem. For example,

1. Errors are easy

   A researcher referenced in the article did an analysis of the spreadsheets collected during the investigation of the infamous Enron collapse. Of the 10,000 Excel files reviewed, 25% had at least one error such as math, format conversion, or circular references. That is a GIANT number! For all Enron’s issues, it was first a financial company, so they certainly weren’t Excel novices. Sadly, this error rate is probably common.

2. Errors cascade

   Cell references in formulas usually cascade because the result of one calculation is used for the next and so on. Of the Enron spreadsheets with errors, they didn’t have just one. On average they had 750 errors each!

3. Spreadsheets are a generalist’s tool

   Returning to appraisal, appraisers must update spreadsheet templates to accommodate all the kinds of commercial property situations they encounter. They need to add or delete rows or copy and paste data. Trouble is, each change is an opportunity to create a problem.

4. Each document is a new risk opportunity

   Using a spreadsheet template file approach where the formulas are mostly set up prevents the appraiser from starting from scratch. However, each new file an appraiser creates sets up a fresh set of error probabilities. They must edit the file while using it. (Files can be locked, but I’ve not seen that as an acceptable approach for appraisers we talk to.)

The author states, “You wouldn’t fit a kitchen with a Swiss army knife.” I prefer a related metaphor. Could a professional chef prepare a gourmet meal with a Swiss army knife? Yes. Would she want to? Heck no. Shipwrecked on a desert island? A Swiss army knife is perfect. Otherwise, professionalism demands better.