I finally got around to reading Risk Management in the New York Times Magazine. It is one of the best articles on
- Wall Street
- How people game models
- How all models eventually fail
that I have ever read. It is must reading.
All risk management systems, all (complex) models for that matter, are examples of robust yet fragile systems: robust in the face of expected events, yet extremely fragile in the face of unexpected events. Of course we will "fix" our models and rebuild. But remember Hawkins Law:
Progress does not involve replacing one theory that is wrong with one that is right, rather it involves replacing one theory that is wrong with one that is more subtly wrong.
And that more subtle error will one day cause the edifice built upon it to come crashing down. And so it shall always be, since there's no such thing as a free lunch.