The emerging US election results are showing that the more math based people like Nate Silver were extremely accurate in predicting the outcome of the election and the GUT based people were totally off base. See NYT.
This is the same comparison that psychologists have been doing for 50 years between clinical judgement and statistical reasoning. See The Evolution of Thinking.
The pundits making GUT predictions seem to be totally fooled by the Confirmation Bias. They only gave any credibility to information that matched their preferred conclusion.
Risk managers need to take care.
This does not mean that the statistical risk models must be right.
That is because risk models are fundamentally based upon opinions. They are fundamentally a tool of the Confirmation Bias.
Risk models are not models of “what is” as much as they are models of “what will be”. They always reflect one or more biases:
- A bias that the future is predictable. That has not particularly been the case for the past 4 years or so. The future has been decidedly unpredictable. Uncertain is the word that we read over and over. Companies with highly complex models have had less of an advantage over companies without than during the Great Moderation.
- The bias that the future will be just like the past. This bias manifested itself as a totally disastrous blindness to the risks that led to the Great Recession. Or the Fukishima Reactor disaster. It was thought that something could not happen if it has not happened before.
- The bias that the market reflects all available information. The market value of sub prime mortgage CDO in 2006 when mortgage defaults first started happening just does not confirm this bias. And at least half of all corporate defaults happen in a cliff, not a gradual decline.
- The bias that things will be much worse than everyone else thinks. (This is the position of folks like Nassim Taleb and Nouriel Roubini. They can predict disaster every week and be right occasionally. But this is not a useful position for risk managers to take in general. Chicken Little was right, but just once.
So risk managers need to be careful about taking too much comfort from the win for statistics in the Presidential race.Enterprise Risk Management
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