Risk Management

The Challenges of Modelling Financial Risk (Published in

An Excerpt from the article. Click on the title for more......

Particularly following the “failure” of risk models during the financial crisis, a number of critics have highlighted the flaws inherent in several common assumptions used in risk modelling (the use of normal distributions in probabilistic models, and the subsequent failure of models to account for extreme market events, was an especially easy target). Not only is risk modelling based on unrealistic assumptions, state the critics, but it leads to overconfidence and creates an illusion of control. If your smoke alarm is faulty, you might sleep a little bit too deeply, confident in the possibly false belief that you will be alerted in the event of a fire.