By Rick Nason,
PhD, CFA,
Partner, RSD Solutions Inc.
Partner, RSD Solutions Inc.
(Repost of blog from September 4, 2009)
I recently gave
a speech with the above title to the risk group at a large financial
institution. It was a very exciting yet
intimidating audience to talk to. Most
of the audience members had advanced degrees in Mathematics or Physics, while
most of the younger audience members had Masters degrees in Financial
Engineering or Financial Mathematics. It
was a thrill and an honour for me to be invited to spend some time with them.
The title of my
talk might seem a bit strange – and perhaps even insulting to such an
audience. To insult them however was the
exact opposite of my objective. The
point of my talk instead was to focus on how the career in risk pendulum may
have shifted and that mathematical skill may not be the competitive advantage
it once was. Instead my hypothesis is
that mathematical skill combined with creativity, artistic and humanistic
skills are the portfolio of skills
that are now necessary in risk management.
Before
continuing I should explain some of my personal basis for my arguments. I am a physicist that converted a graduate
career in physics into a graduate degree in finance during the early
1990’s. I very much benefited from the
Wall Street hunger for physicists at the beginning of the “math boom” in
finance. However it is my liberal arts
undergraduate degree that I consider to be the most valuable in my development
as risk manager. I believe that the
ability to think in liberal arts terms as
well as mathematical terms is the new black in risk management.
Knowledge of
risk techniques is a commodity. The
ability to think and implement risk management is the value added, and in order
to think and implement risk you need to understand a variety of aspects of risk
– some quantitative but most qualitative.
Additionally you need to be creative and flexible in your thinking. Unfortunately the business schools and
financial engineering schools (and corporate training programs that produce
cookie cutter analysts and consultants) are very good at disseminating
knowledge, facts and frameworks, but knowledge, facts and frameworks are not
the same as the ability to think and do!
One could argue
(and I will argue in a future blog) that risk management is more about
understanding people at both the individual level (within an organization and
within the level of immediate stakeholders) as well as at the sociological
level. Economists and Finance academics
are currently rushing to make their mea culpas that their models cannot work in
a world composed of irrational masses.
The Behavioural Finance field has evolved to chronicle our collective
mass irrationality (stupidity?) but offers few if any solutions for overcoming
this collective handicap.
We thus come
back to the fact that it is the artists of the world who may be best prepared
to deal with the current shortcomings of quantitative risk management and
repair the image of the field.
Ironically physics and mathematics used to attract the creative types –
those who dreamed and thought creatively.
When I was a graduate student in physics it was common for students to
use psychedelic drugs not for pleasure but to help them think more creatively
and more outside the box. (Names
withheld for obvious reasons.) While I
am most certainly not advocating illegal drug use, I do believe that there
needs to be a call made for more creativity and artistic license in the field
of risk management. Physicists and
financial engineers also like to drive Lamborghinis and should release their
inner artist in order to regain the comparative value added that allows them to
do so.
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