The best-laid plans are. . . .subject to change. An article by Joe Nocera in this week’s New York Times Magazine causes me to put on the back burner my plans to blog on the concept of probability and its various expressions. I can do that later, but right now I want to persuade you to read Nocera.
Offering a really good capsule history of Value-at-Risk modeling for the uninitiated, Nocera delves into a theme that has pervaded my recent blogs for Palisade Corporation: it may not be the model but more likely the person managing the modeling who introduces slop into risk analysis. He has talked to a good many risk management experts, and is able to present a balanced view of both the limitations of VaR techniques and the shortcomings of the people who relied so heavily on their risk assessment techniques as to bring about the collapse of those sectors of the financial markets that depend on hedging and mortgages.
One thing that will be a relief to any of you who are doing quantitative risk assessment, Nocera never points a finger at Monte Carlo software or any other category of quantitative analysis software. So, the problem isn’t the tools. It may be the—
I don’t want to spoil this excellent article for you.