The Cheeky, the Funky and the Dummy Monkey…

Guest Post from Stelios Ioannides (risk manager)

In the risk management field, various players are being involved; quite a few are more sophisticated, others are more intelligent and some others are being better informed than the rest. It is a fact that each of these players (as it happens besides in a variety of disciplines) has a different vision and understanding on what is meant by “risk management”. Most importantly, few of them might be passionate about pure modeling and quantitative work, and in the other extreme, a few others might even really hate their risk related work: as they view it as a very, very, boring task. They still continue to do it though out of necessity or due to lack to alternative options. As you can understand, the way these different people apply the concepts of risk management is quote different.

In this short piece of opinion, I will try to present the current “crisis” situation, trying to understand how we end up like this; I will focus on mainly three kinds of professionals or alternatively on three “Monkey” beings that are directly or indirectly relayed with this interesting and fast paced arena.

Using Sophisticated Risk Measures…

There has been a debate around on the usage and applicability of metrics like Value at Risk (VaR) and similar risk sensitive measures. Very important people support these measures but on the other side there is a group of equally intelligent and prestigious practitioners and academics that basically scarp such “dump” initiatives. Who is right? And who is wrong?

I think that metrics like VaR etc are quite useful as long as long their user knows the fundamentals, the assumptions and what is essentially happening the behind the senses. If you blindly trust such measures without asking the right questions or without challenging your assumptions, I think you run a high risk for various reasons. Let’s see how our professionals (all “males” monkeys” for simplicity) behave in this complex and chaotic world.

The Dummy Monkey…

This kind of professional, never or rarely asks questions. He blindly trusts the risk software that he is using in order to perform his job. Work can be hectic as he might need to elaborate and complete loads of calculations on a daily basis. He is neither interested or cares on risk management concept or best practices. The important thing for him is to prepare the report with the numbers or the information being asked for and that’s it.  The consequences of his work are unknown to him. He is not necessarily aware of the decisions that will be taken (such decisions will be based on the work that HE eventually has produced). In the majority of the cases he is not aware how the models were built or who was involved in the development of the models or software.  In that respect, he cannot improve or correct things. He is just capable of typing various inputs into the right, hopefully, boxes and derives some automated reports that in most cases mean nothing to him.  So who can build the models then? What is really going on here?!

The Funky Monkey…

The intellectual curiosity of the kind of professional urges him to study and work hard.  This monkey is very clever and gifted. He works restless and builds fantastic models. The thing is these models might be wrong and very possibly, these models do not necessarily reflect reality. But who cares?  That is fine thought. As long as these “reliable – enough” (who gives the approval, who validates?) financial models, that can be used easily by the dummy (user) monkeys is fine. Who cares about reflecting reality and getting the fundamentals 100% right? The thing is to have more or less an acceptable and an “accurate” tool (or better framework) that behaves as he (the model creator) wishes. But what happens when these “funky” beings are wrong? Because they can get perfectly wrong – they work hard, long hours and alone… – who guarantees that somewhere or somehow a mistake was not made (everybody can get confused every now and then, right?)? Do we have the right, objective and independent control measures in place? What happens if not?

Funky monkeys get hired by the Cheeky Monkeys; they get paid good money…

The Cheeky Monkey…

This “being” is the risk management professional at the very high level. Quite powerful and important, he dedicates loads of time executing risk management decisions. He is not merely interested on how answers are being derived or who derived these answers or even who designed the application, model or framework. As long as a clear and straight forward audit trail (well not necessarily) is accompanying such results, then is perfectly fine. The only thing that matter is that such risk measures are being used as indicators and reference for his performance bonus.

More stuff on this worth examining profile? Well, I cannot say mush as I having reached that level…

(To be Continued)

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