http://www.nakedcapitalism.com/2009/01/woefully-misleading-piece-on-value-at.html

Which discusses the article above.

What exactly was the black swan event???
No single event represents this crisis.
A number of factors led up to it.

In the end it is human behavior.
What motivated the behavior? Ego, hubris, greed, Ideology, group think.

No model will ever catch the black swan event.

There is one basic principle to keep a system stable…

1. Consistency.

Your breakfast is not 4 toasts when you are thin and 2 toasts when you are trying to lose weight. The key to maintaining your weight is to get the number of toasts right sticking to it.

Other examples:
You don’t lower rates by 6% in in year
You don’t go from 20% down to 0% down
You don’t use historical data when the types of mortgages have changed

The list goes on.

Obviously consistency is not attractive nor exciting.

Our society admires genius and barely notices a well-rounded person with above average intelligence in all areas… Diversification is not only key in portfolio management but in most areas of life, yet is rarely valued.

It’s no wonder risk is mismanaged, we don’t value the right types of people and intelligence for our own good.

I’ll write about this at my blog soon. The main idea is to have risk models that work even when markets freeze up. If you can’t live with the markets being closed, or even wide bid-ask spreads, your risk model does not work.

The thing about the quants is that people often confuse hard work and knowledge of a narrow discipline with intelligence. They are not the same. I remember some of the Ph.D’s in the math dept. where I studied were really not very bright, but they did have a Ph.D. Quants may be able to do all those calculations, but they may not be able to tell you when they are worth anything.

My two cents:

VaR is like many other things where people try to apply complicated mathematics to situations for which they aren’t meant. It looks impressive to those who don’t know any better and gives them a feeling of certainty which is something many like.

I remember after getting my M.S., I interviewed with a small company that did predictions of future energy needs for whatever Entergy used to be called 30 years ago. They did it by fitting curves to past numbers and thinking that the curve was predictive. Of course, the curve only told you what had happened and not what would happen. Real BS

I tend to agree with those who said that VaR was good for showing you when things were getting abnormal. For that, it’s probably a useful tool.

http://www.reuters.com/article/ousiv/idUSTRE5021V320090104

When all you have is an elephant gun, everything looks like a charging elephant…

good night.

Bill Werner is an optimist.

Wiser words I have rarely read. Thank you for that.