23 septembrie 2008

the fourth quadrant - another perspective

There are just few days since the article of Nassim Taleb, THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS, was published on Edge.org. Plenty of replicas and reactions appeared all over the web. I just wonder if what he says has been perceived on the Europe banking environment as it is a true fact: you can’t predict, don’t fight (i.e. trade) with/against a number. 

I have learnt from the Romanian economy that numbers were always meant to be presented for official reports therefore it really didn’t matter how accurate they were. I would like to know how much would change this mentality the specific requirements based on Basel and SoX. Or what would be the next Basel? More restrictions and more supervisory regulations. 

One was saying once: what does a risk manager have to do for a living? And we are talking here about a very specific job, pretty well defined, that didn’t exist 20 years ago. Though we could say risks were always there no matter we were in Mediocristan or Extremistan. Nassim is making a point in saying “Alas, this category of blind users includes regulators and risk managers, whom I accuse of creating more risk than they reduce.” But as one CEO would say: more risk is more profit what should be than the working incentive for the risk manager? Should we worry about people that make a living out of numbers no one else would understand. If we don’t need them what would replace them?

On the other side I will not cover the red line of the article which I really enjoy but I will stick with my questions around some points I am not sure I fully agree.

He says “my new mission is to build methods to turn lack of information, lack of understanding, and lack of "knowledge" into decisions”. I am looking forward to see that. But common sense would tell me that this is just another extreme of what we face today. Or is it the new petabyte management era?

Is it going Nassim to change the way we look at risks?

As he emphasizes “I have nothing against economists: you should let them entertain each others with their theories and elegant mathematics, and help keep college students inside buildings. But beware: they can be plain wrong, yet frame things in a way to make you feel stupid arguing with them. So make sure you do not give any of them risk-management responsibilities.” 

So the final question: Economists, if we don’t need them what would replace them?

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