- Hardcover: 304 pages
- Publisher: Princeton University Press (October 7, 2007)
- Language: English
- ISBN-10: 0691133611
- ISBN-13: 978-0691133614
- Product Dimensions: 6.5 x 1 x 9.2 inches
- Shipping Weight: 11.4 ounces (View shipping rates and policies)
- Average Customer Review: 12 customer reviews
- Amazon Best Sellers Rank: #2,015,306 in Books (See Top 100 in Books)
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Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently
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"[Plight of the Fortune Tellers] was written to appeal to a wide audience. Stylistically, Rebonato is an engaging writer who uses analogies and interesting examples...I'm confident you'll enjoy this book and that, after reading it, you will join in the dialog that Rebonato has started."--Garp Risk Review
"In his new book, Plight of the Fortune Tellers, Rebonato shows... why Merrill Lynch and Citigroup shareholders are right to be concerned. Nowhere have I read a better account of how a conscientious, intellectually disciplined market risk manager approaches his work in today's complex world. Well known to Risk readers as a master of interest rate modeling, Rebonato has written an accessible, non-technical book."--Nicholas Dunbar, Risk
"In Plight of the Fortune Tellers, Rebonato analyzes and offers solutions to problems related to quantitative risk management strategies and the value-at-risk (VAR) methodology currently used by financial managers. Through stories, examples, theory, and practical methods, he first provides a critical review of the current state of affairs in investment risk management. Then, he proposes how we should 'revisit our ideas about probability in financial risk management' and 'put decision making back at center stage.' In Plight of the Fortune Tellers contains valuable insights into the development of VAR methodology and problems associated with its use in the present financial management arena. . . . In Plight of the Fortune Tellers is a book recommended for practitioners currently involved in quantitative methods and for students of investments and risk management at the graduate school level."--James Jackson, CFA Digest
"This is an enjoyable, approachable book that may be read by anyone with an analytical mind. It is free of mathematics, yet it makes no concessions when it comes to explaining the complexities of a problem...I found a flowing prose that was a pleasure to read...[P]light of the Fortune Tellers is a great wake-up call for the industry. It deserves to be widely read since we all would like to be able to rely on the stability of the financial sector. It would be nice to get the risk management right."--Jessica James, Physics World
"Remember that feeling of bewilderment after your first few weeks in your first job after university? That wrenching realization that, while the theories that you had laboured to understand may have been illuminating, they were too abstract to be applied to the real world? Reading Riccardo Rebonato's intriguing book brings those memories flooding back. For while Rebonato well understands, approves of, and writes about quantitative probability and risk theory, his day job involves actually managing financial risk. Hence he appreciates the limits both of theory and of applying it to real world situations. . . . There is considerably more meat in this wise, practical, yet unpretentious book than can be summarized in a short review."--John Llewellyn, The Business Economist
"Riccardo Rebonato is a better fortuneteller than the risk analysts he writes about. He has read the palms of the 'quants' who revel in developing ever more complex risk models and found that their 'real life' line is rather short. But apart from confirming the prejudices of a financial journalist with no statistical training, is this book worth reading? The answer is yes. It is timely; the subject--financial risk management--matters hugely; it provides a relatively accessible guide to annoyingly influential statistical theories; and it makes you think."--Financial World online
"Plight of the Fortune Tellers is insightful and entertaining. It provides a non-technical yet sophisticated introduction to the perils of modern risk management and it has the potential to lead us in a better direction. Don't miss it."--Lisa R. Goldberg, Journal of Investment Management
"This book should be on the reading list of experienced risk managers in the financial services industry as well as students who are contemplating a career in the field. It provides a thoughtful qualitative companion to more equation-laden texts on modern risk management."--Moshe A. Milevsky, Journal of Pension Economics and Finance
From the Inside Flap
"A fascinating book that very comprehensibly covers the evolution of risk management. Very interesting perspective, accessible to all--from experienced market practitioners to interested beginners."--Jonathan P. Moulds, Bank of America
"While others build straw men only to tear them down, Rebonato stands on the intellectual foundations of his profession to both articulate its weaknesses and suggest a plan for material advancement. This he does with respect, precision, and humor, makingPlight of the Fortune Tellers a welcome oasis in the desert of dry risk management texts."--David Shimko, Towers Perrin
"Riccardo Rebonato provides a refreshingly clear and skeptical analysis of the limitations of quantitative risk management, the naveté of too many decimal places, and the sloppy ways in which people talk about probability."--Emanuel Derman, Columbia University, head of risk at Prisma Capital Partners, and author of My Life as a Quant: Reflections on Physics and Finance
"This is a unique book: a treatise on risk management with no equations! Since equations are frequently substituted for thought in this area, the book is long overdue. Riccardo Rebonato is one of the leading technical writers in this area, and now brings his experience to bear on the elephant in the room of risk management: do the equations do what their advocates claim? All will benefit from Rebonato's insights, including his proposals for how to reform risk management."--Ian Cooper, London Business School
"In this elegant and controversial book, the author discusses and rejects the current paradigm of quantitative risk management. Rather than the traditional frequentist methods, he advocates using probabilities-as-degree-of-belief and probabilities-as-revealed-by-actions as better approaches to decision making under financial uncertainty. General readers as well as risk-management professionals, students, and academics will find this book exciting and illuminating."--Alexander Lipton, managing director, global head of credit analytics, Merrill Lynch International
"An extremely timely book that will no doubt cause a stir. It is a reality check that carries great authority because of the author's experience and position in the industry and his knowledge of both the business end and the technical side. This is a well-written, entertaining book that will generate a lot of debate in the financial industry about the future of quantitative risk management."--Alexander J. McNeil, coauthor ofQuantitative Risk Management
"Very engaging and in places quite provocative. This book will be a wake-up call for the financial risk management industry. Certainly a good read."--Lane Hughston, King's College London
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It has clarified my thoughts on my own research. We need to know when models are working and when they are failing. The deviation statistics measure when LCRT valuation models are working and when they are not. As long as stock prices remain within Rawley Ranges of Bounded Rationality, both the valuation model and the price dispersion model are working. When prices fall outside of these ranges, something is WRONG! The models are not working. Either the structure is incorrect, the models are missing relevant variables, or a Black Swan uncertain event never seen before has occurred. (Frank Knight’s definition to distinguish risk from uncertainty is most relevant here.)
It all fits together!
I wish his Chapter 10 had covered Benoit Mandelbrot’s research on fat tailed distributions and associated frequency risk measures. He might have referenced Bart Madden’s work on System Thinking and associated research into continuous improvement based on feedback from the data.
Review Originally Written for the Book Club of the CFA Society of Chicago where I serve on the Education Committee.
Co-Editor of: The Valuation Handbook: Valuation Techniques from Today's Top Practitioners.
Co-Author of: ValuFocus Investing: A Cash-Loving Contrarian Way to Invest in Stocks
Considering the fact that the entire world financial system would have failed in 2008 without massive government intervention it is pretty clear that financial risk needs to be looked at in a different way. This book provides some foundation for this, but the issue is much larger, with a significant political dimension. What Dr. Rebonato does is provide an analysis of risk that you will rarely find in finance courses. In fact, I had just finished a finance course when I read this book. For one of the class projects we used five years of monthly return data (e.g., sixty monthly returns). On several occasions we estimated the 5% Value-at-Risk. What I had not considered and what Dr. Rebonato points out at some length was that this estimate was questionable. There were only a few data points out at that end of the curve. As Rebonato points out, trusting any analysis with so few data points requires careful thought.
The book follows this pattern: looking more deeply into the financial techniques and assumptions that are frequently used without many questions. The book also makes an argument for Bayesian statistics. Like most people (and the readers the book is aimed at) I studied classical "frequentist" statistics, so its hard for me to know how valid Rebonato's argument is. I did, however, order a copy ofDoing Bayesian Data Analysis: A Tutorial with R and BUGS.
At one point in the book Rebonato discusses why there should be risk officers or risk analysis professionals at investment banks. He had previously discusses cases where rogue employees had caused huge losses, but oddly he did not list "risk police" as a reason for risk professionals. This seems odd to be me because investment banks have a problem that risk analysis can address: traders are trading with other people's money. A trader stands to gain if their bets pay off. At worst they get fired if they lose and, as those at Long Term Capital Management found out, this does not necessarily end their career. Without risk professionals to oversee a bank's risk, there is the danger that the traders will "blow up" the bank. Or the hedge fund.
I recommend this book for anyone interested in finance and it is certainly approachable for someone with a business focused MBA background. For those with a more quantitative focus the book will provide an important perspective on what they have learned in class.
I should, perhaps, have given the book five stars. Rebanato sets himself the difficult task in writing a book for a more general readership. As a result, there is a limit to the detail provided. Rebanato argues for a Bayesian approach, but I have no idea how Bayesian statistics might be used. Given the objective of the book, this is understandable and probably unavoidable. But its still a frustrating feature of the book.
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