NYT on analytical versus subjective risk management

http://www.nytimes.com/2009/01/04/magazine/04risk-t.html

by jacobscott • 18 years ago

4 2 18 years ago

"For instance, if you have $50 million of weekly VaR, that means that over the course of the next week, there is a 99 percent chance that your portfolio won’t lose more than $50 million."

So, if you run with that strategy for, say, 2 years, the odds are one of those weeks you will lose $50M. Sounds secure, where do I buy in? Fortunately for my current portfolio and margin limits, it is mathematically impossible to lose even $1m in a given week.

russell• 18 years ago

An excellent article that gives you a look at the mathematical model, Value at Risk, that brought down Wall Street. VaR turned out to be a problem because it was accepted by the regulators and executives, but it could be gamed by the traders.

It has a profile of Nassim Taleb, author of "The Black Swan." A Black Swan is an unpredictable event, because the day to day probability is so low, say a world wide liquidity crisis. Taleb argues against probability based models, because in the long run an outlier is going to kill you. I got "The Black Swan" for Christmas. I have read only 3 or 4 chapters so far, but I highly recommend it. Very interesting and very entertaining.

NYT on analytical versus subjective risk management

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