Let's be humble and take a look at home. The home of actuaries, accountants and last but not least 'quants'.
Gewußt oder nicht gewußt?
Actuaries and accountants have failed in foreseeing the credit crisis. Together, we have greatly underestimated the developments and put our head in the sand. We've also failed to bring the emerging crisis to a possible end through enhanced cooperation with each other or by sending out common strong signals. In short: "Wir haben es nicht gewußt!"
Without an adequate technical substantiation, we have trusted business plans promising ROEs of 15% and more. This, while we all know that the average risk-free rate is still about 10% below this level and that such high returns can certainly not be made without taking additional risk.
As an article in The Actuary shows, we got intimidated and overruled by the quants with their Value at Risk (VaR) models. The consequences of the advices of these magic mathematicians and their VaR models are well explained in an excellent article called 'Risk Mismanagement' in the New York Times.
In another article, Global Association of Risk Professionals Review, David Einhorn explains:
VaR ignores what happens in the tails.
It specifically cuts them off.
A 99% VaR calculation does not evaluate what happens in the last 1%.
This makes VaR relatively useless as a riskmanagement tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. " Quote:
Also, according to Bloomberg, the risk-taking VaR model is broken and everyone is coming to the realization that no formula or rating system can substitute for old-fashioned 'due diligence'.
Because of the complexity of these new VaR-like models, experienced actuaries, accountants, managers and supervisors were all afraid to ask deeper questions or to admit that they didn't totally understood these complex models that were presented as 'simple manageable board instruments' with 'simple steering parameters'. Just like nobody is eager to admit that 'quantum mechanics' is hard to understand and therefor every amateur quantum guru can say what he wants, because nobody checks it.
This way, indirect and by our advice and our models, CEOs and CFOs of large companies and pension funds got the (wrong) impression that 'complex financial markets' were based on 'a sound statistical model', where (annual) deficit risks of 2.5%, 0.5% or 0.1% are exactly calculable and moreover also acceptable.
Whatever, lessons learned, new opportunities for actuaries to set a new benchmark for '21 century riskmanagement'.
However..., stay careful, to catch a tiger by the tail is risky!