Tallying up the results of yesterday's poll about formula sheets (as of 8:00 Tuesday morning, 39 total comments), people were overwhelmingly in favor of formula sheets. 72% of respondents reported being allowed to use formula sheets as students, and 69% were in favor of allowing formula sheets as faculty. A substantial number of the "no" responses were in favor of providing important formulae on the test paper.
This is more or less in accord with my own preferences. My general practice is to allow students to make up their own formula sheets in intermediate classes. In the introductory classes, I tend to supply them with a formula sheet containing all the equations used in class. This is mostly because when I teach those, it's usually one section of several, and I have colleagues who are strongly opposed to home-made formula sheets.
My thinking is that the process of making a formula sheet often plays a useful part of studying. Not so much for those students who simply write really small, and cram every single formula from the book onto a sheet of paper (I generally allow one side of one piece of paper for the formula sheet), but students who take the time to decide what's really important get something out of it.
It also allows students to include things that are helpful for them, but not necessarily helpful for other people. I tell them that they're perfectly within their rights to put notes about process and pitfalls on the sheets as well, so long as they don't include any worked examples. If a student always forgets to normalize the wavefunction, and writing "Normalize the wavefunction, you dolt!" on a sheet of paper will help them remember, then they're welcome to do that.
I think that home-made formula sheets also help to avoid one of the most depressing exam errors, which is the grabbing of totally unrelated formulae from other parts of the class. This happens all the time with kinematic problems in intro mechanics-- there are four variants of the kinematic formulae, each eliminating different variables, and I only ever use two. One of my colleagues feels strongly that since all for are highlighted in the book, all four need to be on the formula sheet, and every time I teach that class, I seem to get at least one student who grabs one of the ones I don't use, because it happens to have some of the right symbols in it, and applies it incorrectly. If they've made their own formula sheet from their own notes, this doesn't happen as much.
Of course, there's no way to avoid all of the possible failure modes-- students are remarkably clever about finding unexpected routes to wrong answers-- but I figure that anything I can do to help them avoid the depressingly dumb errors is worthwhile.
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You say that you allow notes about process "so long as they don't include any worked examples". How do you enforce this rule? It sounds to me like you have sufficiently few students that you could reasonably ask them to hand in their formula sheets with the test and look at them, but I'd expect some students to give you some trouble over the definition of "worked example".
Whenever I've been somewhere where homemade formula sheets were allowed, there were no restrictions on content -- usually the rules were just that the sheet had to be handwritten, in order to stop people who would xerox multiple sheets onto a single one. But both the institutions I'm thinking of (my undergrad institution where I was in classes where such sheets were allowed, and my current graduate institution where I've been a TA) had larger classes.
I also often found that making a formula sheet was an important part of studying. Often I'd make the thing and never look at it during the exam. (I am also someone who took copious notes during classes and rarely looked at them after; something about the act of taking notes got the material in my brain.)
I collect the formula sheets when I collect the tests. I haven't had any major problem with people pushing the limits of acceptable content. Ironically, the one student I've had who came closest to crossing the line bombed the question that was most likely to benefit from the boundary-pushing content.