With the dominance of high mathematics in the world of investment banking, it seems that computer models have become the 'fortune tellers' of the financial world. 'Quants'—those that follow mathematical models exclusively—like the numbers to tell the story or to predict the future. However, these methods alone can be a very dangerous way of managing and regulating financial risk. For all its apparent quantitative sophistication, much of the current approach to the management of financial risk rests on conceptually shaky foundations.
With a breath of fresh air and a contrarian point of view, Riccardo Rebonato argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using a proper understanding of probability, experimental psychology, and decision theory in his new lively book 'Plight Of The Fortune Tellers: Why We Need to Manage Financial Risk Differently'.
Rebonato, the global head of market risk and global head of quantitative research and analysis at the Royal Bank of Scotland, contends that this is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. He challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers and banking regulators have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices - they can’t. In the equation-free Plight Of The Fortune Tellers, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under uncertainty.
Plight Of The Fortune Tellers is not only a book for the decision makers of Wall Street, it’s a must read for anyone concerned about how today’s financial markets are run. The stakes have never been higher—can you risk it?
Publication Date: 31, October 2007