What is wrong with VaR

Value at Risk (VaR) is often criticised. This is especially the case from those who don't use it, no surprise there and I label such propaganda as statistical xenophobia by the masses. There is even a mainstream following that claims in some respect that the use of Value at Risk should be scrapped. Interestingly, I have never met anyone of this thinking who is able to suggest a viable and cognitive alternative. Well, not quite yet that is.

In this post we look at the problems with VaR and what can be done to improve this measure of potential downside.

Problems with Probability

Why we don't know what we talk about when we talk about probability has been revisited by its original author Nassim Taleb in a recent publication on his Fooled by Randomness portal. Great claims are being made in this paper that perhaps we should ban the use of probability and sometimes the best discoveries seem to occur when we explore dynamics at their extremities. This might just be the case here as well.

In this short post, we take a look at the recent paper "Problems with Probability" published by Nassim Taleb.

Frequency x Magnitude - the wrong measure

In the world of operational risk, there are a lot of analysts who believe that they can dimension the impacts from uncertainty by counting the number of events they experience over a period of time and then multiply that count by the average loss amount for the total event horizon. This approach for quantifying the impacts from uncertainty is full of error and it should be avoided.  In fact, let's be clear, it is so fundamentally wrong as a measure of exposure that it isn't even a good estimate of how much operational risk may cost us in the future.

In this article we will look at why F x M = Exposure, doesn't equal the true potential loss for operational risk and what can be done to improve this measure of risk.

ISO 31000 and Objectives

ISO 31000 is becoming a popular risk framework, a credible alternative for COSO and many organisations across the planet are now selecting this approach for formalizing their internal risk programs directly. Actually, ISO 31000 is probably taking the lion's share of market interest for risk management at present and that isn't such a bad thing.

One aspect that sets ISO aside from many other risk frameworks in use, is its clear delineation yet connection between an objective and the objectives uncertainty. In this article we take a brief look at this relationship.