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jerryking : peter_bernstein   7

Coronavirus, Ray Dalio and forecasting in an age of uncertainty
March 18, 2020 | Financial Times | by Gillian Tett.

** Against the Gods: the Remarkable Story of Risk by Peter Bernstein.
** Uncharted by Margaret Heffernan.
** Radical Uncertainty by Mervyn King and John Kay.

Ray Dalio, founder Bridgewater Associates, admitted that he had been caught flat-footed by the recent coronavirus-driven market swings. .... It seems that the systems that Bridgewater developed to analyse the flows of finance and economic activities — which have traditionally driven its bets on the direction of stocks, bonds and other securities — did not offer any guidance when looking at a rare event such as the current pandemic. “We did not know how to navigate the virus and chose not to because we didn’t think we had an edge in trading it,” Dalio went on to explain. “So, we stayed in our positions and, in retrospect, we should have cut all risk.”
Now, many readers may feel baffled by this, given that the whole point of investing with a hedge fund is that they are supposed to beat the markets at times of stress....scorn is the wrong response here.....What is interesting to ponder is what this episode reveals about the nature of forecasting — and our modern attitudes towards time.
......the way we think about time is a defining feature of the post-enlightenment world. During much of human history, the future was viewed as a vague and terrifyingly unknowable blur marked by constant bargaining with deities (to ward off disaster) or cyclical seasonal rhythms (of the sort that underscore Buddhist cognitive maps). In modern, post-enlightenment western cultures, however, a linear vision of time emerged that presumes the past can be extrapolated into the future, with a sense of progression, not just cyclicality.

In the 20th century, this gave birth to the risk management and finance professions, as Peter Bernstein wrote two decades ago in his brilliant book Against the Gods: the Remarkable Story of Risk.
....... By 2000, innovations such as computing and the internet were turbocharging the forecasting business to an extraordinary degree, “Human discomfort with uncertainty . . . has fuelled an industry that enriches itself by terrorising us with uncertainty and taunting us with certainty,” However, while the forecasting business has made its “experts” very rich, it is also based on a fallacy: the idea that the future can be neatly extrapolated from the past. Moreover, the apparent success of some pundits in predicting events (such as the 2008 crash) makes them so overconfident that they get locked into particularly rigid models. “The harder economists try to identify sure-fire methods of predicting markets, the more such insight eludes them,”

Is there a solution? Heffernan’s answer is to embrace uncertainty, build resilience, use “narrative” (or qualitative) analyses instead of rigid models and to respect the wisdom of diverse views to avoid tunnel vision.

..........accept radical uncertainty and rethink our models......models (whether they emerge from computer science or economics) are like a compass in a dark wood at night. Navigation tools can give you a sense of direction and orientation; it would be ridiculous to toss them out entirely.

However, if you rely exclusively on them, accidents occur. If you walk through a wood just looking down at the dial of a compass, you will bang into a tree or worse. The trick, then, is to use navigation aids but also to maintain your peripheral vision..........the insights of cultural anthropology is one way to maintain peripheral vision, since it provides a social context for looking at our favoured tools (and thus a way to see their shortcomings).........Either way, now more than ever, we need broader perspectives — and humility — when trying to assess what might happen next, not just with the markets but with the coronavirus outbreak too.
books  Bridgewater  COVID-19  cultural_anthropology  extrapolations  fallacies_follies  forecasting  Gilliam_Tett  hedge_funds  heterogeneity  humility  linearity  mistakes  modelling  pandemics  peripheral_vision  Peter_Bernstein  predictive_modeling  qualitative  Ray_Dalio  risk-management  resilience  shortcomings  turbulence  uncertainty 
10 days ago by jerryking
Risk Management Reports
This site can’t be reached is unreachable.
Search Google for risk info rmr amrdec 97

December 1997 Volume 24, No. 12. The trick in risk management,
perhaps, is in recognizing that normal is not a (default) state of nature but a
state of transition, and trend is not destiny. . . ." (Sept. 1, 1997). Peter Bernstein
John Adams, author of Risk University College London Press, London, 1995
Peter_Bernstein  risk-management  risks  book_reviews  base_rates  ephemerality  transient  impermanence  trends  transitions  normality  quotes 
april 2018 by jerryking
Some of the Wisest Words Ever Spoken About Investing - MoneyBeat - WSJ
Nov 25, 2016

Investing is often portrayed as a battle between you and the markets. Instead, Graham wrote, “the investor’s chief problem — and even his worst enemy — is likely to be himself.”

Evaluating yourself honestly is at least as important as evaluating your investments accurately. If you don’t force yourself to learn your limits as an investor, then it doesn’t matter how much you learn about the markets: Your emotions will be your undoing....Nobel Laureate Daniel Kahneman with his book Thinking, Fast and Slow.
I’m especially grateful that he taught me this: “The most important question is, ‘What is the base rate?’”....Michael Mauboussin, a strategist at Credit Suisse, has taken that hint and compiled base rates for all sorts of corporate measures, so investors can readily check a company’s projections against reality.....From the economist and investing writer Peter Bernstein, who died in 2009, I learned about Pascal’s wager: You must weigh not only the alluring probabilities of being right, but the dire consequences of being wrong....Finally, Mr. Bernstein never tired of emphasizing that we can never know the future — least of all at the very moments when it seems most certain....Richard Dawkins pointed out in a lecture in 1996, many of us today know more about the world around us than Aristotle, the greatest mind of his age, did more than 2,300 years ago: “Science is cumulative, and we live later.”

Investing knowledge is also cumulative, and we all benefit from those who have already learned — and taught — how it works.
investing  investors  gratitude  Peter_Bernstein  wisdom  economists  Jason_Zweig  ETFs  books  Benjamin_Graham  pretense_of_knowledge  base_rates  Michael_Mauboussin  self-awareness  self-analysis  self-reflective  proclivities  probabilities  Pascal’s_wager  Daniel_Kahneman  delusions  self-delusions  emotions  Achilles’_heel  cumulative  Nobel_Prizes 
november 2016 by jerryking
Insuring the Future
March 21 2008 | Memebox | By Jack Uldrich. The future will
largely be determined by the insurance industry’s ability to understand –
and thus underwrite – the future of various technologies. "For example,
in spite of genomics incredible potential to violently disrupt the
insurance industry’s business model of pooling risk, it is possible the
insurance industry will facilitate the adoption of genetic testing by
mandating that patients for certain diseases be genetically tested prior
to the administration of any new drug in order to make sure that that
drug will work effectively on the patient." "As F. Scott Fitzgerald
once said, “The test of a first-rate mind is the ability to hold two
diametrically opposed ideas in your head at the same time.”"
insurance  opposing_actions  Peter_Bernstein  future  innovation  risk-management  disruption  genetics  genomics  dual-consciousness  F._Scott_Fitzgerald 
february 2010 by jerryking
Peter L. Bernstein, Explainer of Risks of Stocks, Dies at 90 - Obituary (Obit) -
June 7, 2009 | New York Times | By LOUIS UCHITELLE

Bernstein, Peter L. (2005). Wedding of the Waters: The Erie Canal and the Making of a Great Nation. New York: W.W. Norton & Co. ISBN 0-393-05233-8.
Bernstein, Peter L. (1996). Against The Gods: The Remarkable Story of Risk. New York: John Wiley & Sons. ISBN 0-471-12104-5.
Bernstein, Peter L. (1992). Capital Ideas: The Improbable Origins of Modern Wall Street. New York: Maxwell Macmillan International. ISBN 0-02-903011-0.
risk-management  books  Wall_Street  Peter_Bernstein  obituaries  financial_history  writers 
june 2009 by jerryking
How to be wise before the event
March 9 2009 | Financial Times | By Stefan Stern.

Restraint is back in fashion in these recessionary times. People have lost their appetite for risk.

But hang on a minute. No risk will mean no reward. You need new markets and customers to grow, and that means taking steps into the unknown. I doubt that anyone will be suggesting, in this newspaper’s new series of articles on the future of capitalism, that risk-taking should be abolished.

Bad risk-management helped get us into the current mess. It is vital that we learn the right lessons about risk from the crisis. What are they?

The new edition of Harvard Business Review contains a lucid piece of analysis from René Stulz, professor of banking and monetary economics at Ohio State University’s Fisher College of Business. While his principal focus is on the financial sector, the diagnosis will be helpful to managers in any business or organisation.

Prof Stulz describes six ways in which risk has been mismanaged. First, there has been too much reliance on historical data among today’s decision-makers. Extrapolating from the past can provide, at best, only partial guidance for the future. Financial innovation has created a new world. No wonder some managers were unprepared for the calamitous fall in asset prices and demand. This collapse was unimaginable to anyone basing their thinking on post-war performance alone.

Second, narrow daily measures – in banking these are known as “value at risk” measures – have underestimated the risks that are being run. The assumption behind a daily measure of risk is that action can be taken quickly (through an asset sale) to remove that risk. But, as the current crisis has shown, such rapid moves become impossible when markets seize up.

Third, knowable risks have been overlooked. Managers who work in silos may appreciate the risks that they personally are exposed to. But they may not see how risks being run elsewhere in the business could affect them too. Someone – a chief risk officer? – needs to track them all.

Fourth, concealed risks have been overlooked. Incentives have proved to be particularly dangerous in this regard. Some traders and lenders may have enjoyed taking risky decisions that in the short term appeared to be delivering well for them and their organisations. But they had no incentive to report any downside risk. And unreported risks tend to expand.

Fifth, there has been a failure to communicate effectively. It is dangerous, Prof Stulz says, when risk managers are so expert in their field that they lose the ability to explain in simple terms what they are doing. The board may develop a false sense of security by failing to appreciate the complexity of the risks being managed.

Last, risks have not been managed in real time. Organisations have to be able to monitor fast-changing markets and where necessary respond to them without delay.

Prof Stulz offers a useful technical analysis. But a true understanding of risk also requires a maturity of outlook, an ability to see the big picture, and deep experience. This last is a rare commodity: impossible to fake and acquired only over time.

In a new McKinsey publication called What Matters, the 90-year-old investment manager and author Peter Bernstein offers some sober insights. “What is risk management all about anyway?” he writes. “We use the words as though everybody understands what we are talking about. But life is not that simple. Risk means more things can happen than will happen – which is a fancy way of saying we do not know what is going to happen.”

Mr Bernstein’s central point – not revolutionary, but unarguable – is that downside risks must be assessed rigorously. Someone old enough to remember the Wall Street crash is probably worth listening to right now.[JCK: elder wisdom]

“Nothing is 100 per cent sure,” Mr Bernstein says. “While a 95 per cent probability is statistically significant, that still leaves us in the dark about the remaining 5 per cent; we may decide to accept that uncertainty and bet on the 95 per cent sure thing, but there is still a possibility of being wrong.

“The crucial question to ask is, ‘What would be the consequence if that 5 per cent chance comes to pass?’ ”

Welcome to the less exciting but more soundly based era of calculated risks. For the foreseeable future, business leaders will be trying to be wise before rather than after the event.
beforemath  business  communicating_risks  downside_risks  elder_wisdom  false_sense_of_security  fast-changing  financial_innovation  hidden  historical_data  management  McKinsey  overreliance  Peter_Bernstein  recessions  real-time  risks  risk-assessment  risk-management  Stefan_Stern  the_big_picture  VaR  what_really_matters  wisdom 
may 2009 by jerryking
McKinsey: What Matters: The heart of risk
23 February 2009 | mckinseydigital | By Peter L. Bernstein

The key question in decision making is, “What happens if I am wrong?”
decision_making  risk-management  Peter_Bernstein  uncertainty  mistakes  risks  pretense_of_knowledge  self-doubt 
march 2009 by jerryking

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