Some thoughts on modeling complexity

First of all, I'm making this up.  Second, this seems to be true enough to at least me after three years of doing retirement modeling and simulation. Let me try to dilate on the letter-points along my fake curve.


D. "Truth." This is a theoretical "true" safe spend rate at some particular point in time given a set of assumptions and some degree of optimism about projecting oneself into an unknowable future.  I say "some point in time" because even if we could get a handle on this, which we can't really, it's unstable even in the present.  Unknowable and unstable spend rate in an unknowable future. Let's at least call D an aspirational goal in financial modeling.

A. Simple Model.  Many models, including some of my own, are hopelessly naive and probably overly generous when it comes to estimating spend rates given the untidyness of the future.  Incremental additions to the complexity and real-lifeness of the model are more than likely warranted assuming one knows what complexity to add and how.

B. Complex Model 1. There are no shortage of financial models, including some of mine, that would probably benefit from some simplification.  Not only do they overly conservatize spending decisions at some point in time, they also would benefit from things like transparency and ease, if not cost, of maintenance via simplification.  Adding complexity at point B may be unlikely to help in terms of cost, transparency, or even "the answer." Better to back up the curve a bit.

C. Complex Model 2. Some happy few models could maybe go either way.  If cost and transparency were to be equal in either direction (unlikely) then some simplification or complexity could add value in terms of usability and end user success.   I've had this sense, for example, in reading some papers by G. Irlam where his approach to complexity seems to add value and round the corner at "C." I've seen outfits like Newfound Research pull this trick off as well though not necessarily related to spend rates. This is a unique skill.  Let's call this another aspirational goal.