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Interesting blog on Forbes
http://blogs.forbes.com/greatspeculations/2011/04/07/manage-risk-like-robert-rubin/
Excerpt:
Numerical and statistical methods are used to make many decisions for decision makers, but numerical and statistical methods are just one of many decision making tools that form a complete decision making tool kit. For example, application of experience, wisdom and intuition are other modes of analysis.
I once heard a speech given by former Treasury Secretary and Goldman Sachs risk assessor Robert Rubin. At the time of the speech he was serving as co-chairman of Citigroup. And at that very moment the (ultimately disastrous) AOL-Time Warner deal had been announced that very day. It was the height of the dot.com era’s madness, and Citigroup had been the investment banker behind the deal.
In the midst of worldwide media and investor attention what did Robert Rubin choose to speak about to a group of the world’s money management community hungry for “deal of the century” news? The limitations of statistical methods to fully model, and therefore properly describe, risk.
Robert Rubin pointed out that whatever statistical model/probability distribution curve you used never had fat enough tails. This is a fancy way of saying that risks are always higher than you think they are. This is a fancy way of saying that statistical significance is not the only way to measure risk.
Mr. Rubin said that in his capacity as Goldman Sachs’ executive in charge of risk assessment that he came up with a simple heuristic that was just as powerful as any model. That heuristic? “By definition the greatest risk is the one you didn’t account for.”
http://blogs.forbes.com/greatspeculations/2011/04/07/manage-risk-like-robert-rubin/
Excerpt:
Numerical and statistical methods are used to make many decisions for decision makers, but numerical and statistical methods are just one of many decision making tools that form a complete decision making tool kit. For example, application of experience, wisdom and intuition are other modes of analysis.
I once heard a speech given by former Treasury Secretary and Goldman Sachs risk assessor Robert Rubin. At the time of the speech he was serving as co-chairman of Citigroup. And at that very moment the (ultimately disastrous) AOL-Time Warner deal had been announced that very day. It was the height of the dot.com era’s madness, and Citigroup had been the investment banker behind the deal.
In the midst of worldwide media and investor attention what did Robert Rubin choose to speak about to a group of the world’s money management community hungry for “deal of the century” news? The limitations of statistical methods to fully model, and therefore properly describe, risk.
Robert Rubin pointed out that whatever statistical model/probability distribution curve you used never had fat enough tails. This is a fancy way of saying that risks are always higher than you think they are. This is a fancy way of saying that statistical significance is not the only way to measure risk.
Mr. Rubin said that in his capacity as Goldman Sachs’ executive in charge of risk assessment that he came up with a simple heuristic that was just as powerful as any model. That heuristic? “By definition the greatest risk is the one you didn’t account for.”
