Ironic reference to “Conning”!? I wish I could be sure…
“You just cannot incorporate everything into a model. It would take ages to build and, once you’re done, things will have changed, making your model outdated and less relevant. How do you build a 9/11 or fraudulent behaviour into a risk model? How do you incorporate insider trading or the sudden default of a large bank into a risk calculation of a portfolio? You cannot. It is not about the probability of these events, which, to a certain degree can be estimated. It is all about their consequences. These are extremely difficult to define and quantify. When it comes to modelling risk models are particularly difficult to build…”
I know acceptance of the facts is not easy but …the ability of the system to adapt, often in completely unpredictable ways, means that you can’t model it and you can’t foresee the outcomes of any strategy of intervention. It’s all completely unknowable in advance.
Ironic reference to “Conning”!? I wish I could be sure…
“You just cannot incorporate everything into a model. It would take ages to build and, once you’re done, things will have changed, making your model outdated and less relevant. How do you build a 9/11 or fraudulent behaviour into a risk model? How do you incorporate insider trading or the sudden default of a large bank into a risk calculation of a portfolio? You cannot. It is not about the probability of these events, which, to a certain degree can be estimated. It is all about their consequences. These are extremely difficult to define and quantify. When it comes to modelling risk models are particularly difficult to build…”
I know acceptance of the facts is not easy but …the ability of the system to adapt, often in completely unpredictable ways, means that you can’t model it and you can’t foresee the outcomes of any strategy of intervention. It’s all completely unknowable in advance.
David