Notes from Joe Nocera's article, "Risk Management"

See my previous post for a link to the article.

The Black Swan: The Impact of the Highly Improbable - Nassim Nicholas Taleb

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets - Nassim Nicholas Taleb

mea culpa

Faulty historical data contributed to the failure of the existing financial models.

"People tend not to be able to anticipate a future they have never personally experienced."

charlatans

Black Swan Protection Protocol - Hedge Fund

VaR - Value at Risk. Risk Management model developed by "quants" at JP Morgon in the late 1980's to early 1990's. Designed to

"gauge the possibility that any kind of portfolio could lose a certain amount of money over the next 24 hours, within a 95 percent probability".

The model was designed to help

"make judgments about whether the firm should take on additional risk or pull back."

patrician

Roger Lowenstein - "When Genius Failed". The fall of Long Term Capital Management (9/1998)

schadenfreude

comeuppance

Liquidity Crisis

Quote:

In a crisis, Brown, the risk manager at AQR, said, “you want to know who can kill you and whether or not they will and who you can kill if necessary. You need to have an emergency backup plan that assumes everyone is out to get you. In peacetime, you think about other people’s intentions. In wartime, only their capabilities matter. VaR is a peacetime statistic.”

prosyletizer

CDS

Richard Bookstaber - "A Demon of Our Own Design"

Quote:

Ethan Berman says, “he recognized that he didn’t have the transparency into risk that he needed to make a judgment. VaR gave him that, and he and his managers could make judgments. To me, that is how it should work. The role of VaR is as one input into that process. It is healthy for the head of the firm to have that kind of information. But people need to have incentives to give him that information.”

Risk

My dad recently gave me a copy of "Against the Gods: The Remarkable Story of Risk", by Peter L. Bernstein. As I was reading this on a bumpy plane flight to LA, I was reminded of my company's blog on Risk. Reading through a some prior posts led me to this article on Risk Management by Joe Nocera, published in the New York Times Magazine.

The article begins with the following quote:

‘The story that I have to tell is marked all the way through by a persistent tension between those who assert that the best decisions are based on quantification and numbers, determined by the patterns of the past, and those who base their decisions on more subjective degrees of belief about the uncertain future. This is a controversy that has never been resolved.’

— FROM THE INTRODUCTION TO ‘‘AGAINST THE GODS: THE REMARKABLE STORY OF RISK,’’ BY PETER L. BERNSTEIN

I found this amusing, and the topic interesting.