Re: Peter Bernstein

From: Glyn Holton
Affiliation:
Address:
Date: 15 May 2007
Time: 13:52:16

Comments

What I found appealing about Bernstein's comment was the last sentence: "What matters in thinking about risk is the quality of the decisions we make in the face of uncertainty." This parallels so closely my own comment from two years earlier: "A more practical question is whether a risk metric is useful. Used in a given application, will it promote behavior that management considers desirable?" I think neither comment discredits the value of risk measurement. They recharacterize that value. So often, questions come up about whether a risk metric accurately captures risk (note the whole debate about coherent risk metrics) or whether a risk measure is accurate (the whole business of backtesting). The two quotes suggest that what really matters is whether the risk metric and/or measure contribute to sound decision making. Bernstein and I offer sightly different criteria. He calls for "quality decisions." I think that is a difficult criteria to test for. I call for the slightly less relevant criteria of whether use of a particular risk metric (or risk measure or other tool of risk assessment) promotes "behavior that management considers desirable." That is more practical and certainly easier to test for.

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