What do you see as the biggest challenge for managing risk in the real world?
We are principally practitioners, which entails a much much more rigorous approach to risk. Academic love theories, but science isn’t about risk and survival but about what can be proved using a certain set of methods. What cannot be proved is left out.
Put the science where it belongs and know the limits of science beforehand. There are many areas where we take decisions where science cannot help, so it is foolish and UNSCIENTIFIC to be scientific about these things rather than use precautionary heuristics.
So our job is to formalize a set of rules and heuristics with clearly defined things. Before SILENT RISK nobody tried Bourbaki-style to formalize risk management by making everything clearly and explicitly defined and stating what can and what cannot be captured by “models” and what a payoff means.
Risk is not science, it is not practice, it is not probability, it is not economics, it is not statistics. Risk is RISK, a disciple on its own, with its own rigor. As a discipline it is formalization, Urgently. So my project — both real-world and anti-anecdotal — is inspired of the many historical efforts and projects aimed to instil rigor in domains that grew organically in a confused way, by starting from the basics and expanding, Bourbaki-style, in a self-contained manner but aiming at maximal possible rigor. This would be a Bourbaki approach but completely aiming at putting the practical before the theoretical, a real-world rigor (as opposed to Bourbaki’s scorn of the practical and useful, justified in a theoretical field like mathematics).
[Note BOURBAKI was a group of French mathematicians who rebuilt mathematics on formal bases.]
Who do you most respect in the risk management community currently?
To be honest, only the decision makers who emphasize that we need to worry about ruin probabilities not just variations. The blowup risk needs to be zero, otherwise the system is not sustainable. In business the chairman of Goldman Sachs said that. Same with . Among practioners-mathematicians, Ed Thorp is the most sophisticated.
What are you reading at the moment?
Russian material in probability. Some classics, and I am scouring legal theory to see how historically the scholastics defined and dealt with risk: lawyers were very sophisticated, ahead of mathematicians.
Financial crises are as old as the pyramids- there is nothing we can do to stop them. Do you agree?
Certainly. But we have known since Babylon what makes systems survive crises.
What are you most looking forward to about hosting the real world risk management workshop at RiskMinds?
The atmosphere and feeling that people want rigor.
You can hear more from Nassim Taleb this December at RiskMinds International, where he will be running a workshop on ‘Risk Management in the Real World’.