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Financial Risk Management Article

Thursday, January 8th, 2009
Posted in Advice by Joel Gross

Found a great article on the New York Times about the risk models used by the so-called “finance geniuses” that were so tragically wrong.‚  It boils down to the fact that most of the risk models were based on historical data and did not consider the fact that markets can sometimes be wildly unpredictable… heck, there is even the miniscule probability that financial markets could go all the way to zero.‚  Most of the models instead were based on the last few years of constantly uptrending markets… Merrill Lynch’s computer risk model for real estate did not even give traders the ability to enter a negative percentage number into the forecast for the housing market!‚  We all heard the BS line from real estate agents that “Housing prices always go up” … but who knew that Harvard-educated financiers also bought into that crap?!?!