In Modeling Risk, the Human Factor Was Left Out

In the Business section of yesterday’s New York Times, there was an excellent article entitled “In Modeling Risk, the Human Factor Was Left Out”. Among other things, this article points out the dangers of people treating financial models like black boxes and not fully grasping model limitations. The article’s main premise is not that the models are wrong or culpable as far as the financial crisis concerned. Rather, the problem boils down more to fundamental failures in human judgment.

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One thought on “In Modeling Risk, the Human Factor Was Left Out”

  1. Risk can be a difficult thing to quantify. It’s easy to calculate the frequency of tornadoes and the severity of tropical cyclones as they are both tangible and measured by insurers and government agencies. Other risks, however, depend on complicated mathematical models and quantitative analysis to decipher risk. For financial risk management complex metrics have been the rule of the day for many years, but is risk management really just about numbers and scientific models?

    http://betterriskmanagement.blogspot.com/2008/11/perfection-is-not-mathematical-model.html

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