Credit crisis and risk

Credit crisis and risk

The credit crisis would not have been as bad if investment banks' risk management systems worked well. But the systems rely on sophisticated mathematical models that have a fundamental flaw: they grossly underestimate a factor called "tail risk." This problem can be solved fairly easily.

In a way, this is a highly technical dispute about the arcane details of the calculation of Value at Risk, the prime measure of the riskiness of trading books. To nonmathematicians, the possible answers sound daunting: Gaussian, Cauchy and Pareto-Levy. But the underlying question is straightforward: how often and how badly do markets blow up?
Read more at the New York Times:

http://www.nytimes.com/2010/05/11/business/11views.html