by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Mathematician Keith Devlin is quoted in “The Universe and the Teacup” by K.C. Cole as saying, “To really understand what it means to think rationally, mathematics will need to team up with psychology and sociology, and perhaps even biology and poetry.”
This was very similar to a presentation I made earlier this summer to the CFA Society of Toronto on New Axioms, Assumptions and Paradigms of Risk Management http://www.rsdsolutions.com/quotrisk-management%0Bnew-axioms-assumptions-and-paradigms, (see in particular slide 37), and a different presentation I made on “Sociological Finance” to the 2010 CFA Pension Conference in Toronto.
Risk management, as well as mathematics, needs to learn from sociology and psychology. To be clear I am NOT talking just about behavioural finance. Sociology, psychology, and biology tell us about complex systems and how complex systems and human interactions evolve (become emergent to use the technical term). What is needed is creative people who are not hung up with the mathematics of risk management. The confines of mathematics have taken us a long way in risk management, but it is time to realize that we are asking too much of the mathematics and the mathematicians. Perhaps it is even time for risk departments to employ poets. I wonder if Billy Collins is interested in doing some moonlighting.
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