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Financial Modeling Explained

Financial Modeling Explained to a 7-y.o. Kid

My daughter sometimes asks me “Dad, what do you do?” OMG, how shall I make financial modeling explained to her? My usual answer is kind of 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.

 

So, I decided to give her a simple example. She is a fan of collectible L.O.L. dolls. I decided to use the Glitter series collection as an example. There are just 12 dolls in the series, but you never know which one is inside the ball. At first this is a 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.

 

I have made a simple financial model using the Monte-Carlo simulation technique. I wanted to show my daughter that it’s not that easy to collect the 12 dolls. It takes on average as much as 59 dolls to collect the series. And even then the dispersion of results is so large that there still is a 24% chance that we will not get the full collection even after buying as much as 100 dolls.

Financial Modeling Explained

I told her “OK, Ann! Get some friends of you to collect these series – let’s see how much better our chances become”. So, we modelled what happens if she can exchange the spare dolls with other girls.  The bad news is that the chances are not getting much better. Having an ultra-rare doll in the collection makes is very difficult for someone to have a spare one for exchange. We have modeled that on average she needs to get at least 5 friends to collect these series to keep my bill below $500. :O

 

At the end of the day she said “You know what, dad, this just takes too long to collect! Let’s go buy something else”. I am not sure though that she won’t change her mind. At least financial modeling helped her to understand that it is not as easy as it seems to collect all of the dolls. Hope this also helped her to get financial modeling explained and to understand how my work helps other people to better understand the numbers behind their decisions.

 

I attach my model with all the formulas. You might want to work with it in the manual calculation mode.

Financial Model

Financial model – lol dolls (9.7 Mb)

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