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Deciding exactly what to include and leave out of a model is the most important part of modeling. Worst of all, people often automatically validate models that agree with their preconceptions. Its not that I do not believe in quantitative models, I practiced building them for years. It is that there has to be a balance between common sense and quantitative infrastructure. One way to embrace this is to use the technique of scenarios.
The risks of risk management
Banks now employ thousands of highly-qualified mathematicians to quantify risk for them. So why did they not foresee the credit crunch? Quantitative finance lecturer Paul Wilmott explains how a failure to see beyond the numbers might be to blame.... "
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