In Theory

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

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In theory ….  When you hear someone say that, you almost expect a “but” is coming very soon.  In theory, a lot of things are true, but in practice, or from experience, we know that they are not true.  Theory and experience are two very different things; a point that should never be forgotten.

How much of risk management is based on theory, and how much of it is based on experience?  How much of risk management theory do we assume is based on experience?  Perhaps more importantly, how much of it is based on relevant experience

The sad truth is that much of what currently passes for best practice in risk management is based on theory, not experience, nor even wisdom for that matter.  As a researcher, I am not knocking theory per se, but theory needs to be respected and understood and utilized for what it is, and as well for what it is not.

In theory, theory is great.  In practice, I will choose wisdom, critical thinking and experience.