Quants plead not to be ruled out of risk management equation

Taking my daily dose of FT online, I was struck by the article entitled Count us in, maths experts tell regulator which, in summary, seems to boil down to the agreement by both Lord Turner and financial mathematicians (aka "quants") that maths is a very powerful tool if used properly by people who understand the business they are modelling. This reminds me strongly of the point I raised in my Excel is like a chainsaw blog late last year which draws the similar conclusions that powerful tools need to be operated by people who fully understand the business and also understand the weaknesses and not just the strengths of the approaches they use. This has been borne out strongly in areas such as compliance and risk management over recent years.

Our recent risk management survey found a consensus that too much reliance was put on quantitative as against qualitative measures (crudely relying too much on taking numbers at face value rather than also applying business judgement) and over 70% saying use of similar pricing and risk models contributed to market volatility.

Don't get me wrong though, financial maths has an essential place in finance. Just as you would not try to build a modern office block with only hand tools, you cannot build an effective risk management function in a bank without widespread use of sophisticated statistics. It is just that without the architects and builders understanding of construction it is all too easy to use some techniques to build a house of cards with poor foundations and little stability. What is needed is a vibrant debate through various market channels - e.g. the media such as the FT, or here on Finextra (comments to this blog are welcome) to determine the better balance than we have had over past years. For example, this is a major part of why we are running a follow up event to our survey later this month to look at the lessons to be learnt and the immediate actions to be taken. Why not put down the chainsaw or jackhammer for the morning of 25th June and join the debate?