A model is just an approximation of reality. There is no substitute for experience and intuition in building models of the world, otherwise you wind up like this.
Industry experts are now saying market participants shouldn’t rely exclusively on mathematical models but should also use the social sciences to understand behaviors—of home owners, for instance.
They’re also calling for more disclosure and more transparency from market participants.“It’s time perhaps to put aside mathematics and somehow find the right balance between qualitative, quantitative and sensitive risk management,” Philippe Carrel, global head of business development at Thomson Reuters, said Wednesday at a forum in New York on valuation risk.
“Risk management is becoming an art,” he said. “Risk starts to be managed now, as opposed to being merely quantified in the past.”
Friday, May 9, 2008
After my series of posts on Surviving as a quant here and here, I see that there is finally some calls for reality checks on models in this article (italics are mine):