by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
In the initial blog in this four part series about models, I talked about how models were a balancing act. In the first blog I discussed how models were a balancing act between being too general (and useless), and too specific (and also useless). In the second blog I inferred that models were a balancing act between hiding things and not hiding things. In the third blog I implied there needed to be a balance between information provided by models and the actions taken by managers. (OK, that is a bit of a stretch, but I think you get my point.)
In this last blog for the series I would like to bring up the balance between keeping a model static and adapting it to changing conditions. A model that is constantly changing (through time) will not provide much guidance or comfort, as it will not be capable of being tested under different conditions. Likewise a model that never changes to account for developments in knowledge or industry practice will also not be of much use.
The upshot of all of this talk about models and balance is that using models is really tough! Too often regulators, managers, and other stakeholders believe that if the right model is selected that all will be great. That is far from the truth and the reason why we need to get back to an emphasis on managing and less of an emphasis on modeling.
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