I am privileged to call Alexei Sidorenko “friend”. I first met him when he invited me to come to Moscow and speak at a risk management conference he organized,
He is an experienced and insightful risk practitioner and CRO whose thoughts I listen to and recommend you do the same.
Recently he shared his opinion and advice on his Risk Academy blog, Quant models overthrow traditional risk management: embrace or perish?
It’s an odd title, but the content is interesting. I like these statements:
Multiplying single number likelihood with single number consequences is bad risk management. You can sometimes use the resulting expected losses for budgeting, but most of the time this resulting number is useless (strike that, replace with misleading and negligent) for risk mitigation, insurance or risk reporting. Just don’t do it. It’s like trying to loose [sic] fat with arsenic, sure, women did before 1900s, but thank God we realised it is just poison.
Instead replace likelihood and consequence number or rating with distributions. They look and feel the same but preserve the correct mathematical relationships which allows risks to be calculated correctly and added together.
Alex has done us al a great service by explaining how you can use very inexpensive tools and techniques to do this.
Where he and I start…
