A parallel and related question to how much detail there
should be in a valuation is the one of how complex a
valuationmodelshouldbe.Thereareclearcoststhatwepay
as models become more complex and require more
information.
- Information overload. More information does not
alwaysleadtobettervaluations.Infact,analystscan
becomeoverwhelmedwhenfacedwithvastamounts
ofconflictinginformation,andthiscanleadtopoor
inputchoices.Theproblemisexacerbatedbythefact
thatanalystsoftenoperateundertimepressurewhen
valuing companies. Models that require dozens of
inputstovalueasinglecompanyoftengetshortshrift
fromusers.Amodel’soutputisonlyasgoodasthe
inputs that go into it; it is garbage in, garbage out. - Black box syndrome. The models become so
complicatedthattheanalystsusingthem nolonger
understand their inner workings. They feed inputs
intothemodel’sblackboxand theboxspitsouta
value. Ineffect, the refrainfrom analysts becomes
“The model valued the company at $30 a share”
ratherthan“Wevaluedthecompanyat$30ashare.”
Of particular concern should be models where
portionsofthemodelsareproprietaryandcannotbe
accessed(ormodified)byanalysts.Thisisoftenthe
case with commercial valuation models, where
vendors have to keep a part of the model out of
bounds to make their services indispensable. - Bigversussmallassumptions.Complexmodelsoften
generate voluminous and detailed output and it
becomes very difficult to separate the big
assumptions from the small assumptions. In other