The Cheeky, the Funky and the Dummy Monkey… (2)

From Stelios Ioannides (risk manager)

Continuation of earlier post.

Who is to blame?

OK enough, I agree with you: this is an exaggeration of the situation or the situations that we are currently experiencing but reality can be quite close. What happened in the credit sub-prime crisis can only be justified, in my opinion, by such “monkey” logic. At the end of the day, it’s about designing products, valuing (appropriately) risk, and getting on board the “right” clients with a “desirable”, for our purposes profile. Who is doing that?  And how? The industry failed spectacularly on that. It allowed to this “monkey” concept to grow and to gain potential.

Who cares about Value at Risk or CTE and the associated graphics, if there is no clue at all on how these “interesting” numbers were derived in the first place? Using a number with out know the source it is like having a map with numbers but with no street names. You do not know where you are, you might know where you are heading (vaguely) but there is absolutely no way you can reach your destination.

Having some well defined risk measures is just a well accepted methodology that justifies capital intensive and risk sensitive decisions at the big scale. So if you are applying it wrongly, things can fail dramatically, at a huge scale, causing chaos. And of course, when things go wrong the funky or the dummy monkeys will be blamed… These are the ones that will loose their jobs. The cheeky ones stay alive and are the ones that will be hiring soon again.

The way forward

Understanding the details and being aware with the fundamentals is crucial is this arena. “Understanding” is about having the right combination of skills and applying these fundamentals. It is also about being able to realize how decisions that might be executed in interrelated contexts like pricing, capital reserving and hedging (just to mention a few) might be derived by ones work.

Knowledge exists, technology exists and in my opinion, it is a pity that people still stick to the old practices.  There is strong need to refresh or at least fine tune these well established “ways of doing things”. In no situation, we should act like “robots” that mechanically do things.  We need monkeys that are owners and responsible of their piece of work regardless how small that is.

If we fail to do that then the “disease” might propagate in otter industries, and in that case of course, the consequences might scary (at least to say).  We spent millions or even billions for initiatives like Basel, but we have to make sure that some basic, common sense and ethical rules are being obeyed at all levels.

Risk industry calls for better quality transparency and people should soon or later realize that sharing knowledge and information and aligning interests and objectives would benefit, in most cases all parties (of the same side) involved in the project or deal. The way assumptions are derived is crucial. At the same time, being able to control the behavior of clients is of paramount importance.  How this is achieved? A way is possibly by proper underwriting and classification.

Conclusions

We are working in various dimensions, we are dealing with risk free worlds, real words, real market assumptions, marking to market and so on and so fourth. Concepts like “Stress Testing” are gaining momentum and potential.  In our daily work we have to face concepts like implied volatilities, volatility surfaces, “short-selling” (it took me a while to get this right, honestly) and a few even more complicated terms that I do not want to even to mention them here. The list of these complicated terms is endless and growing fast.

In any case, people have the duty to use these concepts in a consistent and ethical way.  Sticking to basic and rather simplistic approaches with regards o problem solving is not wise in the fast world we are living.

We have the duty to teach the new generations how to synthesize skills and knowledge and judge impartially and ethically. I personally believe that the future belongs to the people that the have the courage to ask right questions and the patience to apply the fundamentals … it is the duty of each one of us to find out what that really means.

Perhaps, we could elaborate more one that but due to lack to time I cannot. Hopefully this won’t be the case when I will have to deliver a super important risk project in the future. What am I? Well something in between the dummy and the funky monkey (hopefully closer to the later or better the former?)…

Advertisements
Explore posts in the same categories: Financial Crisis, Modeling, Risk Management, Value at Risk, VaR

Tags:

You can comment below, or link to this permanent URL from your own site.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: