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