Should we “kill all the quants?”
By Douglas A Samuelson
The financial crisis, Hurricane Katrina and the BP oil spill have aroused many claims that quantitative risk analysis failed. Even fairly sober scientific reviews seriously criticized models in general [Scientific American, 2008] or called for a major change in their use [Lo, 2009]. Douglas W. Hubbard’s book on failures of risk management [2009] has been a popular hit, raising the most intriguing question of why modelers don’t usually apply quantitative measures to how well their models worked. (He and this reporter followed up on his main points in an article for OR/MS Today [Hubbard and Samuelson, 2010]). Even more popular and more trenchant is Nassim Taleb’s “The Black Swan,” based on the assertion that the most important events are the “unknown unknown” ones, beyond any modeling method’s scope [Taleb, 2007]. These critiques raise major questions about the uses and limitations of risk analyses, and about the ways in which managers expect to use them.
To read the full article please visit http://analytics-magazine.com/january-february-2011/78-why-risk-analysis-fails.html
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