Who still wants to pay for Professional vanity?


My esteemed colleague, Bala Desphande (at Ontonix USA), delivers…as usual! If you want to read the full article here is the link: Risk of using Models in Risk Management – Part 1

I am still amazed how many people, in senior positions within major institutions, still argue for a belief system so dangerously flawed. They are fixated with the ability to predict the future and not a crystal ball in sight!!!

Conventional risk management, of the variety used by the likes of Lehman, involves calculating the probability of the maximum loss a given portfolio can experience over a specified time horizon. Let us unpack this statement for what its worth:

 

1. We first need to specify a time horizon – fairly simple,

2. We need to compute the return of this portfolio over this time period – any financial website can feed a spreadsheet to do this,

3. Then we need to state the probability that the return (or loss) will be below (or above) a certain value.

Hmm 3. gives me a problem! How much faith should any right-minded person have in a vision of our future based upon an incomplete picture of our immediate past, some mathematical theory and a model to satisfy the belief system. P-l-l-l-ease.

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