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Introduction to Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently

In: Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently

Author

Listed:
  • Riccardo Rebonato

    (Royal Bank of Scotland, University of Oxford, Tanaka Business School, Imperial College London)

Abstract

Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading--and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers --and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices--but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under uncertainty. Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher--can you risk it?

Suggested Citation

  • Riccardo Rebonato, 2007. "Introduction to Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently," Introductory Chapters, in: Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently, Princeton University Press.
    • Handle: RePEc:pup:chapts:8474-1
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    Citations

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    Cited by:

    1. Alejandro Reveiz & Carlos León & Freddy H. Castro & Gabriel piraquive, 2009. "Modelo de simulación del valor de la pensión de un trabajador en Colombia," Borradores de Economia 553, Banco de la Republica de Colombia.
    2. Imad Moosa, 2012. "Basel 2.5: A lot of sizzle but little nutritional value," Journal of Banking Regulation, Palgrave Macmillan, vol. 13(4), pages 320-335, November.
    3. Ignacio J. Martinez-Moyano & David P. McCaffrey & Rogelio Oliva, 2014. "Drift and Adjustment in Organizational Rule Compliance: Explaining the “Regulatory Pendulum” in Financial Markets," Organization Science, INFORMS, vol. 25(2), pages 321-338, April.
    4. Christian Hugo Hoffmann, 2017. "Towards Understanding Dynamic Complexity in Financial Systems Structure-based Explanatory Modelling of Risks," Systems Research and Behavioral Science, Wiley Blackwell, vol. 34(6), pages 728-745, November.
    5. Tuckett, David, 2012. "Financial markets are markets in stories: Some possible advantages of using interviews to supplement existing economic data sources," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1077-1087.
    6. Willett, Thomas D. & Srisorn, Nancy, 2014. "The political economy of the Euro crisis: Cognitive biases, faulty mental models, and time inconsistency," Journal of Economics and Business, Elsevier, vol. 76(C), pages 39-54.
    7. Zoltan VARSANY, 2008. "A Simple Model Of Decision Making Ï¿½How To Avoid Large Errors?," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 320-328.
    8. José Eduardo Gómez González & Carlos Eduardo León Rincón & Karen Julieth Leiton Rodríguez, 2009. "Does the Use of Foreign Currency Derivatives Affect Colombian Firms´ Market Value?," Borradores de Economia 5514, Banco de la Republica.
    9. Llacay, Bàrbara & Peffer, Gilbert, 2017. "Impact of value-at-risk models on market stability," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 223-256.
    10. Varsanyi, Zoltan, 2008. "A simple model of decision making: How to avoid large outliers?," MPRA Paper 9528, University Library of Munich, Germany.
    11. John R. Boatright, 2013. "Swearing to be Virtuous: The Prospects of a Banker's Oath," Review of Social Economy, Taylor & Francis Journals, vol. 71(2), pages 140-165, June.
    12. Gregory Connor & Lisa R. Goldberg & Robert A. Korajczyk, 2010. "Portfolio Risk Analysis," Economics Books, Princeton University Press, edition 1, number 9224.
    13. Thomas D. Willett, 2012. "The role of defective mental models in generating the global financial crisis," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(1), pages 41-57, April.
    14. Christian Hugo Hoffmann & Charles Djordjevic, 2020. "Complexity, Power Laws and a Humean Argument in Risk Management: The Fundamental Inadequacy of Probability Theory as a Foundation for Modeling Complex Risk in Banking," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 37(3), pages 155-182, December.
    15. Connel Fullenkamp & Ms. Celine Rochon, 2014. "Reconsidering Bank Capital Regulation: A New Combination of Rules, Regulators, and Market Discipline," IMF Working Papers 2014/169, International Monetary Fund.

    More about this item

    Keywords

    financial risk management; decision making; financial planning; probablity; experimental psychology; decision theory; financial markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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