Behavioural Risk Management
First published:
ISBN: 9781782724230
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Value-at-Risk as the Dominant Risk Management Tool in the Financial Industry
Preface
An Introduction to Behavioural Risk Management
Risk Management Context
Value-at-Risk as the Dominant Risk Management Tool in the Financial Industry
Case Studies on Risk Management Failure
The Role of Regulation in Risk Management
Advances in Behavioural Economics and Finance
Behavioural Issues with Probability
Systems Theory
Using Scenarios
Making Robust Decisions
Advances in the Risk Management Process
Behavioural Risk Management in the Financial Markets
Countervailing Power
Behavioural Risk Management: Closing Thoughts
Appendix: Selective list of Behavioural Biases
Bibliography
Risk management as a profession has developed over time, and this chapter will discuss how it has done so. It will examine VaR as the dominant risk measurement tool. Most readers will be familiar with the technical aspects of VaR, so we will discuss its origins and emphasise its importance for the financial industry. In an implicit manner, VaR has gained influence through many risk management decisions taken by financial institutions. This chapter will discuss the assumptions underlying VaR, analyse when they are applicable and offer some recommendations for its use.
The main message is that VaR is built upon neoclassical economic theories that used to be sound , but as we will see in Chapter 6 those theories have progressed. This has clear implications for risk managers working with VaR on a daily basis. The VaR toolkit will need to be amended with new tools, as we will show throughout this book. Risk managers in the 21st century need to expand their toolkit beyond VaR.
This chapter will start by describing the historical journey of VaR, including the neoclassical economic paradigm, before analysing the concept of stochastic modelling and its pros and cons. It will explain
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