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Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently
Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading--and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers --and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices--but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under uncertainty. Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher--can you risk it?
304 pages, Hardcover
First published September 17, 2007
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Displaying 1 - 3 of 3 reviews
December 11, 2016
Published shortly before the crisis of 2008, this is a thoughtful, minimally technical book about the misuse of statistics in finance by a relatively well-known figure in the industry.
The early chapters that describe Bayesian statistics in layman's terms were excellent. The way Rebonato cast the problem of bad financial statistics into inadequate weight and formulation of priors was a kind of "a-ha" moment for me. The lessons of history at very long timeframes can and should influence our opinions on future outcomes, and our ability to make statistical statements based on a few years of data is necessarily weak regarding phenomena that occur at longer cycles. (Let us hope no one ever says or publishes anything more about "10,000-year" financial events; not only do we definitionally not have enough data, but data today may not be good in a decade's time, much less ten millennia.)
The inadequacy of some of the financial industry's models has been covered at length since 2008, but too often I think the message ends up being something like "toss math out the window." The real problem is the abuse of math, and the false sense of certainty that quantification can bring. Thinking about risk in a Bayesian context requires us to acknowledge the prior assumptions that go into our models on one hand and the subsequent effect our data has had on our beliefs about what may happen in the future, from which point we can ask ourselves whether our new beliefs are reasonable or whether we have structurally assumed possibilities away.
The book has some overlap with topics discussed by the much more famous Nassim Taleb, but compared to Taleb's writings, it is less dyspeptic and contains fewer philosophical digressions, which for my money makes it a better read. (I did greatly enjoy Fooled by Randomness, but the various more recent online articles by and about him have greatly discouraged me from reading him further.) It gets a little dry towards the end - the "economic capital" chapter and the prescriptive chapter at the end are primarily of interest to people in banking and less so to casual readers. But overall, great read for people who want to seriously understand the capabilities and limitations of quantitative methods in social settings.
The early chapters that describe Bayesian statistics in layman's terms were excellent. The way Rebonato cast the problem of bad financial statistics into inadequate weight and formulation of priors was a kind of "a-ha" moment for me. The lessons of history at very long timeframes can and should influence our opinions on future outcomes, and our ability to make statistical statements based on a few years of data is necessarily weak regarding phenomena that occur at longer cycles. (Let us hope no one ever says or publishes anything more about "10,000-year" financial events; not only do we definitionally not have enough data, but data today may not be good in a decade's time, much less ten millennia.)
The inadequacy of some of the financial industry's models has been covered at length since 2008, but too often I think the message ends up being something like "toss math out the window." The real problem is the abuse of math, and the false sense of certainty that quantification can bring. Thinking about risk in a Bayesian context requires us to acknowledge the prior assumptions that go into our models on one hand and the subsequent effect our data has had on our beliefs about what may happen in the future, from which point we can ask ourselves whether our new beliefs are reasonable or whether we have structurally assumed possibilities away.
The book has some overlap with topics discussed by the much more famous Nassim Taleb, but compared to Taleb's writings, it is less dyspeptic and contains fewer philosophical digressions, which for my money makes it a better read. (I did greatly enjoy Fooled by Randomness, but the various more recent online articles by and about him have greatly discouraged me from reading him further.) It gets a little dry towards the end - the "economic capital" chapter and the prescriptive chapter at the end are primarily of interest to people in banking and less so to casual readers. But overall, great read for people who want to seriously understand the capabilities and limitations of quantitative methods in social settings.
September 1, 2009
Thought-provoking study of risk management
Reading this book is like reading the prophecies of Cassandra, whose fate was to speak the truth to the unbelieving. In the wake of the fiscal crisis, no one can question the observation that the practice of financial risk management has serious flaws. Business journalist Riccardo Rebonato’s discussion of why and how financial institutions misunderstand and mismanage risk provides valuable insights. He works to make his ideas accessible beyond the narrow circles of financial economists and quantitative risk managers. He uses no equations in the text, and his few graphs are clear and accessible. He states his case against excess reliance on statistical methods in plain language. getAbstract believes that his analysis should interest any manager or regulator whose responsibilities include oversight of finance.
Reading this book is like reading the prophecies of Cassandra, whose fate was to speak the truth to the unbelieving. In the wake of the fiscal crisis, no one can question the observation that the practice of financial risk management has serious flaws. Business journalist Riccardo Rebonato’s discussion of why and how financial institutions misunderstand and mismanage risk provides valuable insights. He works to make his ideas accessible beyond the narrow circles of financial economists and quantitative risk managers. He uses no equations in the text, and his few graphs are clear and accessible. He states his case against excess reliance on statistical methods in plain language. getAbstract believes that his analysis should interest any manager or regulator whose responsibilities include oversight of finance.
May 26, 2015
This was suggested by a client. It's a good way to think about the misleading aspects of financial risk. I'd add it to any read related to liquidity and the financial markets.
Displaying 1 - 3 of 3 reviews