Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently

Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently

Hardback

By (author) Riccardo Rebonato

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  • Publisher: Princeton University Press
  • Format: Hardback | 304 pages
  • Dimensions: 162mm x 234mm x 26mm | 322g
  • Publication date: 1 October 2007
  • Publication City/Country: New Jersey
  • ISBN 10: 0691133611
  • ISBN 13: 9780691133614
  • Illustrations note: 5 tables.
  • Sales rank: 516,837

Product description

Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading - and it puts us all at risk. This is the case that Riccardo Rebonato makes in "Plight of the Fortune Tellers" - and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance.Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices - but they can't. In this book, 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?

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Author information

Riccardo Rebonato is global head of market risk and global head of quantitative research and quantitative analysis at the Royal Bank of Scotland. He is visiting lecturer in mathematical finance at the University of Oxford and adjunct professor at the Tanaka Business School, Imperial College London. His books include "Volatility and Correlation: The Perfect Hedger and the Fox" and "Modern Pricing of Interest-Rate Derivatives: The LIBOR Market Model and Beyond" (Princeton).

Review quote

[Plight of the Fortune Tellers] was written to appeal to a wide audience. Stylistically, Rebonato is an engaging writer who uses analogies and interesting examples...I'm confident you'll enjoy this book and that, after reading it, you will join in the dialog that Rebonato has started. Garp Risk Review In his new book, Plight of the Fortune Tellers, Rebonato shows... why Merrill Lynch and Citigroup shareholders are right to be concerned. Nowhere have I read a better account of how a conscientious, intellectually disciplined market risk manager approaches his work in today's complex world. Well known to Risk readers as a master of interest rate modeling, Rebonato has written an accessible, non-technical book. -- Nicholas Dunbar Risk In Plight of the Fortune Tellers, Rebonato analyzes and offers solutions to problems related to quantitative risk management strategies and the value-at-risk (VAR) methodology currently used by financial managers. Through stories, examples, theory, and practical methods, he first provides a critical review of the current state of affairs in investment risk management. Then, he proposes how we should 'revisit our ideas about probability in financial risk management' and 'put decision making back at center stage.' In Plight of the Fortune Tellers contains valuable insights into the development of VAR methodology and problems associated with its use in the present financial management arena... In Plight of the Fortune Tellers is a book recommended for practitioners currently involved in quantitative methods and for students of investments and risk management at the graduate school level. -- James Jackson CFA Digest This is an enjoyable, approachable book that may be read by anyone with an analytical mind. It is free of mathematics, yet it makes no concessions when it comes to explaining the complexities of a problem...I found a flowing prose that was a pleasure to read...[P]light of the Fortune Tellers is a great wake-up call for the industry. It deserves to be widely read since we all would like to be able to rely on the stability of the financial sector. It would be nice to get the risk management right. -- Jessica James Physics World Remember that feeling of bewilderment after your first few weeks in your first job after university? That wrenching realization that, while the theories that you had laboured to understand may have been illuminating, they were too abstract to be applied to the real world? Reading Riccardo Rebonato's intriguing book brings those memories flooding back. For while Rebonato well understands, approves of, and writes about quantitative probability and risk theory, his day job involves actually managing financial risk. Hence he appreciates the limits both of theory and of applying it to real world situations... There is considerably more meat in this wise, practical, yet unpretentious book than can be summarized in a short review. -- John Llewellyn The Business Economist Riccardo Rebonato is a better fortuneteller than the risk analysts he writes about. He has read the palms of the 'quants' who revel in developing ever more complex risk models and found that their 'real life' line is rather short. But apart from confirming the prejudices of a financial journalist with no statistical training, is this book worth reading? The answer is yes. It is timely; the subject--financial risk management--matters hugely; it provides a relatively accessible guide to annoyingly influential statistical theories; and it makes you think. Financial World online Plight of the Fortune Tellers is insightful and entertaining. It provides a non-technical yet sophisticated introduction to the perils of modern risk management and it has the potential to lead us in a better direction. Don't miss it. -- Lisa R. Goldberg Journal of Investment Management This book should be on the reading list of experienced risk managers in the financial services industry as well as students who are contemplating a career in the field. It provides a thoughtful qualitative companion to more equation-laden texts on modern risk management. -- Moshe A. Milevsky Journal of Pension Economics and Finance

Flap copy

"A fascinating book that very comprehensibly covers the evolution of risk management. Very interesting perspective, accessible to all--from experienced market practitioners to interested beginners."--Jonathan P. Moulds, Bank of America"While others build straw men only to tear them down, Rebonato stands on the intellectual foundations of his profession to both articulate its weaknesses and suggest a plan for material advancement. This he does with respect, precision, and humor, making "Plight of the Fortune Tellers" a welcome oasis in the desert of dry risk management texts."--David Shimko, Towers Perrin"Riccardo Rebonato provides a refreshingly clear and skeptical analysis of the limitations of quantitative risk management, the navet of too many decimal places, and the sloppy ways in which people talk about probability."--Emanuel Derman, Columbia University, head of risk at Prisma Capital Partners, and author of "My Life as a Quant: Reflections on Physics and Finance""This is a unique book: a treatise on risk management with no equations! Since equations are frequently substituted for thought in this area, the book is long overdue. Riccardo Rebonato is one of the leading technical writers in this area, and now brings his experience to bear on the elephant in the room of risk management: do the equations do what their advocates claim? All will benefit from Rebonato's insights, including his proposals for how to reform risk management."--Ian Cooper, London Business School"In this elegant and controversial book, the author discusses and rejects the current paradigm of quantitative risk management. Rather than the traditional frequentist methods, he advocates using probabilities-as-degree-of-belief and probabilities-as-revealed-by-actions as better approaches to decision making under financial uncertainty. General readers as well as risk-management professionals, students, and academics will find this book exciting and illuminating."--Alexander Lipton, managing director, global head of credit analytics, Merrill Lynch International"An extremely timely book that will no doubt cause a stir. It is a reality check that carries great authority because of the author's experience and position in the industry and his knowledge of both the business end and the technical side. This is a well-written, entertaining book that will generate a lot of debate in the financial industry about the future of quantitative risk management."--Alexander J. McNeil, coauthor of "Quantitative Risk Management""Very engaging and in places quite provocative. This book will be a wake-up call for the financial risk management industry. Certainly a good read."--Lane Hughston, King's College London

Table of contents

Preface ix Acknowledgments xxvii Chapter 1: Why This Book Matters 1 Chapter 2: Thinking about Risk 22 Chapter 3: Thinking about Probabilities 40 Chapter 4: Making Choices 67 Chapter 5: What Is Risk Management For? 107 Chapter 6: VaR & Co: How It All Started 117 Chapter 7: Looking Beneath the Surface: Hidden Problems 139 Chapter 8: Which Type of Probability Matters in Risk Management? 182 Chapter 9: The Promise of Economic Capital 199 Chapter 10: What CanWe Do Instead? 223 Endnotes 259 Index 267