Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently (New in Paper)

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Overview

Today's top financial professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading—and puts everyone at risk. In Plight of the Fortune Tellers, Riccardo Rebonato forcefully argues that we must restore genuine decision making to our financial planning. Presenting a financial model that uses probability, experimental psychology, and decision theory, Rebonato challenges us to rethink ...

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Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently

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Overview

Today's top financial professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading—and puts everyone at risk. In Plight of the Fortune Tellers, Riccardo Rebonato forcefully argues that we must restore genuine decision making to our financial planning. Presenting a financial model that uses probability, experimental psychology, and decision theory, Rebonato challenges us to rethink the standard wisdom about risk management. He offers a radical yet surprisingly commonsense solution: managing risk comes down to real people making decisions under uncertainty.

Plight of the Fortune Tellers is a must-read for anyone concerned about how today's financial markets are run. In a new preface, Rebonato explains how the ideas presented in this book fit into the context of the global financial crisis that followed its original publication. He argues that risk managers are still stuck in a probabilistic rut, and need to engage with the structural causes of real events.

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Editorial Reviews

The Business Economist
Remember that feeling of bewilderment after your first few weeks in your first job after university? That wrenching realization that, while the theories that you had laboured to understand may have been illuminating, they were too abstract to be applied to the real world? Reading Riccardo Rebonato's intriguing book brings those memories flooding back. For while Rebonato well understands, approves of, and writes about quantitative probability and risk theory, his day job involves actually managing financial risk. Hence he appreciates the limits both of theory and of applying it to real world situations. . . . There is considerably more meat in this wise, practical, yet unpretentious book than can be summarized in a short review.
— John Llewellyn
Danny Reviews
Plight of the Fortune Tellers is the best non-specialist introduction to quantitative financial risk management I have found.
Shanghai Daily
This is an interesting book for managers or regulators whose responsibilities include oversight of finance.
— Wan Lixin
Journal of Economic Literature - Philippe Jorion
A fascinating read. . . . Rebonato writes in an engaging prose that is free of mathematics, yet intellectually rigorous. He provides a top-level view of risk management, founded on real-world situations.
Risk - Nicholas Dunbar
In his new book, Plight of the Fortune Tellers, Rebonato shows... why Merrill Lynch and Citigroup shareholders are right to be concerned. Nowhere have I read a better account of how a conscientious, intellectually disciplined market risk manager approaches his work in today's complex world. Well known to Risk readers as a master of interest rate modeling, Rebonato has written an accessible, non-technical book.
CFA Digest - James Jackson
In Plight of the Fortune Tellers, Rebonato analyzes and offers solutions to problems related to quantitative risk management strategies and the value-at-risk (VAR) methodology currently used by financial managers. Through stories, examples, theory, and practical methods, he first provides a critical review of the current state of affairs in investment risk management. Then, he proposes how we should 'revisit our ideas about probability in financial risk management' and 'put decision making back at center stage.' In Plight of the Fortune Tellers contains valuable insights into the development of VAR methodology and problems associated with its use in the present financial management arena. . . . In Plight of the Fortune Tellers is a book recommended for practitioners currently involved in quantitative methods and for students of investments and risk management at the graduate school level.
Physics World - Jessica James
This is an enjoyable, approachable book that may be read by anyone with an analytical mind. It is free of mathematics, yet it makes no concessions when it comes to explaining the complexities of a problem...I found a flowing prose that was a pleasure to read...[P]light of the Fortune Tellers is a great wake-up call for the industry. It deserves to be widely read since we all would like to be able to rely on the stability of the financial sector. It would be nice to get the risk management right.
The Business Economist - John Llewellyn
Remember that feeling of bewilderment after your first few weeks in your first job after university? That wrenching realization that, while the theories that you had laboured to understand may have been illuminating, they were too abstract to be applied to the real world? Reading Riccardo Rebonato's intriguing book brings those memories flooding back. For while Rebonato well understands, approves of, and writes about quantitative probability and risk theory, his day job involves actually managing financial risk. Hence he appreciates the limits both of theory and of applying it to real world situations. . . . There is considerably more meat in this wise, practical, yet unpretentious book than can be summarized in a short review.
Journal of Investment Management - Lisa R. Goldberg
Plight of the Fortune Tellers is insightful and entertaining. It provides a non-technical yet sophisticated introduction to the perils of modern risk management and it has the potential to lead us in a better direction. Don't miss it.
Journal of Pension Economics and Finance - Moshe A. Milevsky
This book should be on the reading list of experienced risk managers in the financial services industry as well as students who are contemplating a career in the field. It provides a thoughtful qualitative companion to more equation-laden texts on modern risk management.
Shanghai Daily - Wan Lixin
This is an interesting book for managers or regulators whose responsibilities include oversight of finance.
Financial World
[Plight of the Fortune Tellers] is timely. . . . [I]t provides a relatively accessible guide to annoyingly influential statistical theories, and it makes you think.
Journal of Economic Literature
A fascinating read. . . . Rebonato writes in an engaging prose that is free of mathematics, yet intellectually rigorous. He provides a top-level view of risk management, founded on real-world situations.
— Philippe Jorion
Garp Risk Review
[Plight of the Fortune Tellers] was written to appeal to a wide audience. Stylistically, Rebonato is an engaging writer who uses analogies and interesting examples...I'm confident you'll enjoy this book and that, after reading it, you will join in the dialog that Rebonato has started.
Risk
In his new book, Plight of the Fortune Tellers, Rebonato shows... why Merrill Lynch and Citigroup shareholders are right to be concerned. Nowhere have I read a better account of how a conscientious, intellectually disciplined market risk manager approaches his work in today's complex world. Well known to Risk readers as a master of interest rate modeling, Rebonato has written an accessible, non-technical book.
— Nicholas Dunbar
CFA Digest
In Plight of the Fortune Tellers, Rebonato analyzes and offers solutions to problems related to quantitative risk management strategies and the value-at-risk (VAR) methodology currently used by financial managers. Through stories, examples, theory, and practical methods, he first provides a critical review of the current state of affairs in investment risk management. Then, he proposes how we should 'revisit our ideas about probability in financial risk management' and 'put decision making back at center stage.' In Plight of the Fortune Tellers contains valuable insights into the development of VAR methodology and problems associated with its use in the present financial management arena. . . . In Plight of the Fortune Tellers is a book recommended for practitioners currently involved in quantitative methods and for students of investments and risk management at the graduate school level.
— James Jackson
Physics World
This is an enjoyable, approachable book that may be read by anyone with an analytical mind. It is free of mathematics, yet it makes no concessions when it comes to explaining the complexities of a problem...I found a flowing prose that was a pleasure to read...[P]light of the Fortune Tellers is a great wake-up call for the industry. It deserves to be widely read since we all would like to be able to rely on the stability of the financial sector. It would be nice to get the risk management right.
— Jessica James
Financial World online
Riccardo Rebonato is a better fortuneteller than the risk analysts he writes about. He has read the palms of the 'quants' who revel in developing ever more complex risk models and found that their 'real life' line is rather short. But apart from confirming the prejudices of a financial journalist with no statistical training, is this book worth reading? The answer is yes. It is timely; the subject—financial risk management—matters hugely; it provides a relatively accessible guide to annoyingly influential statistical theories; and it makes you think.
Journal of Investment Management
Plight of the Fortune Tellers is insightful and entertaining. It provides a non-technical yet sophisticated introduction to the perils of modern risk management and it has the potential to lead us in a better direction. Don't miss it.
— Lisa R. Goldberg
Journal of Pension Economics and Finance
This book should be on the reading list of experienced risk managers in the financial services industry as well as students who are contemplating a career in the field. It provides a thoughtful qualitative companion to more equation-laden texts on modern risk management.
— Moshe A. Milevsky
Physics World
This is an enjoyable, approachable book that may be read by anyone with an analytical mind. It is free of mathematics, yet it makes no concessions when it comes to explaining the complexities of a problem...I found a flowing prose that was a pleasure to read...[P]light of the Fortune Tellers is a great wake-up call for the industry. It deserves to be widely read since we all would like to be able to rely on the stability of the financial sector. It would be nice to get the risk management right.
— Jessica James
Risk
In his new book, Plight of the Fortune Tellers, Rebonato shows... why Merrill Lynch and Citigroup shareholders are right to be concerned. Nowhere have I read a better account of how a conscientious, intellectually disciplined market risk manager approaches his work in today's complex world. Well known to Risk readers as a master of interest rate modeling, Rebonato has written an accessible, non-technical book.
— Nicholas Dunbar
CFA Digest
In Plight of the Fortune Tellers, Rebonato analyzes and offers solutions to problems related to quantitative risk management strategies and the value-at-risk (VAR) methodology currently used by financial managers. Through stories, examples, theory, and practical methods, he first provides a critical review of the current state of affairs in investment risk management. Then, he proposes how we should 'revisit our ideas about probability in financial risk management' and 'put decision making back at center stage.' In Plight of the Fortune Tellers contains valuable insights into the development of VAR methodology and problems associated with its use in the present financial management arena. . . . In Plight of the Fortune Tellers is a book recommended for practitioners currently involved in quantitative methods and for students of investments and risk management at the graduate school level.
— James Jackson
Journal of Investment Management
Plight of the Fortune Tellers is insightful and entertaining. It provides a non-technical yet sophisticated introduction to the perils of modern risk management and it has the potential to lead us in a better direction. Don't miss it.
— Lisa R. Goldberg
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Product Details

  • ISBN-13: 9780691148175
  • Publisher: Princeton University Press
  • Publication date: 11/8/2010
  • Pages: 304
  • Product dimensions: 6.10 (w) x 9.20 (h) x 0.80 (d)

Meet the Author

Riccardo Rebonato is global head of front-office risk management and quantitative analytics at the Royal Bank of Scotland. He is a visiting lecturer in mathematical finance at the University of Oxford and adjunct professor at the Tanaka Business School, Imperial College London. He has written many books and articles on finance.

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Table of Contents

Preface to the Paperback Edition ix
Preface xxxi

Acknowledgments xlix

Chapter 1: Why This Book Matters 1

Chapter 2: Thinking about Risk 22

Chapter 3: Thinking about Probabilities 40

Chapter 4: Making Choices 67

Chapter 5: What Is Risk Management For? 107

Chapter 6: VaR & Co: How It All Started 117

Chapter 7: Looking Beneath the Surface: Hidden Problems 139

Chapter 8: Which Type of Probability Matters in Risk Management? 182

Chapter 9: The Promise of Economic Capital 199

Chapter 10: What Can We Do Instead? 223

Endnotes 259

Index 267

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Sort by: Showing 1 Customer Review

  • Posted September 1, 2009

    more from this reviewer

    Thought-provoking study of risk management

    Reading this book is like reading the prophecies of Cassandra, whose fate was to speak the truth to the unbelieving. In the wake of the fiscal crisis, no one can question the observation that the practice of financial risk management has serious flaws. Business journalist Riccardo Rebonato's discussion of why and how financial institutions misunderstand and mismanage risk provides valuable insights. He works to make his ideas accessible beyond the narrow circles of financial economists and quantitative risk managers. He uses no equations in the text, and his few graphs are clear and accessible. He states his case against excess reliance on statistical methods in plain language. getAbstract believes that his analysis should interest any manager or regulator whose responsibilities include oversight of finance.

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