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Financial Models: Successes and Failures in Risk Assessment

Explore the successes and failures of financial risk models and their impact on financial disasters. Learn how to use and test models effectively to avoid costly mistakes.

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Financial Models: Successes and Failures in Risk Assessment

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  1. Presentation to Joint Meeting ofPRMIA &QWAFAFEW3/23/10 by Bill Margrabe The William Margrabe Group, Inc. 301-766-0604 RewardAndRiskAnalytics.Com

  2. “He fell hard for a beautiful model, but ended up jobless, hurt, broke, and confused.” “Successes and failures of financial risk models and those who use them, with applications to financial disasters of the past two decades.”

  3. The Tiger Woods Story

  4. Tiger Tells Us About Models • Every day we use models. • A model is not reality. • G.E.P. Box said, “All models are wrong.” • Bad models can be expensive. • Good models, badly used, can be expensive. • Test the quality of the models you use. • Don’t be afraid to get help.

  5. “He fell hard for a beautiful model, but ended up jobless, hurt, broke, and confused.” “Successes and failures of financial models and those who use them, with applications to financial disasters of the recent decades.”

  6. My Thesis • Finance without models is like a car without an engine. • The financial disasters of the past 30 years are the result of failures to use models properly. • We could have avoided most of these disasters with normal intelligence, college education, and due diligence.

  7. My Plan Is to Answer These Questions • What is a model? • What models have people used? • What models destroyed people and property? • How can we get the best out of financial models?

  8. I. What Is a Model?

  9. Definition • A model is … • a simpler, … • … abstract … • … representation of reality

  10. Models of Space Road map Nautical chart Subway Map Examples (I) • Models of Time • Alarm clock • Wristwatch • Day planner • Calendar • TV schedule • Bus schedule

  11. Resume CV Biography Examples (II) • Breakfast menu (“Don’t eat the menu.”) • Recipe • Beverage list

  12. Significance • They help us deal with complex reality.

  13. Models of light Ray theories Particle theories Wave theories Quantum theory “All models are wrong, but some are useful.” G.E.P. Box • Models of elephant

  14. II. What Models Have People Used?

  15. Models of solar system Aristotle’s (earth-centered) model Ptolemy’s (sun-centered) model Kepler’s elliptical model Models of Earth • Models of Earth • Earth as a table • Earth as a cylinder • Earth as a sphere

  16. Mendel’s model of inheritence Watson-Crick’s double helix model of DNA structure Scientific Models (II) • Bohr’s model of the atom

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