Risk Analysis Education

Ron Lieber of The New York Times asks, Could the current financial crisis be breeding an entire generation of risk averse traders?

Kevin Brosious, a financial planner in Allentown, Pa., polled the students in his financial management class at DeSales University on the percentage of their portfolios they would allocate to stocks right now. The majority would put less than half in stocks; among their reasons were fear of job loss, lack of accountability on Wall Street and economic fears amplified by the news media.

The problem with their approach, according to Mr. Brosious, is that by investing conservatively they are probably guaranteeing themselves a smaller return and a more meager standard of living in retirement.

Or, as Robert N. Siegmann, chief operating officer and senior adviser of the Financial Management Group in Cincinnati, wrote to me in an e-mail message, “Why would you consider taking less risk NOW after most of the risk has already been paid for in the market over the past 12 months?”

[…]

So what kind of risk should you take on with the savings you have left over? To Moshe A. Milevsky, […] risk should have less to do with the era in which you live and more to do with what you do for a living.

On the topic of reasonable risk assessment, the UK Professor of the Public Understanding of Risk, David Spiegelhalter, believes it may be time to teach risk literacy as part of the mainstream academic curriculum.

“I regard myself as part of a movement we call risk literacy. […] It should be a basic component of discussion about issues in media, politics and in schools.

“We should essentially be teaching the ability to deconstruct the latest media story about a cancer risk or a wonder drug, so people can work out what it means. Really, that should be part of everyone’s language.”

As an aspect of science, risk was “as important as learning about DNA, maybe even more important,” he said. “The only problem is putting it on the curriculum: that can be the kiss of death.”

Like Schneier, this reminds me of John Allen Paulos excellent ‘manifesto’, Innumeracy.

3 thoughts on “Risk Analysis Education

  1. xtophr

    Ironically, risk management is precisely what got us into the current financial fiasco: sophisticated risk models and diffusion of risk through credit default swaps combined with bogus risk assessments from bond ratings agencies like Fitch, and S&P created the perception that the risk was adequately contained for trillions of dollars of mortgage backed securities.

    This is “risk literacy” writ large. The people involved in all this financial risk management –the best and the brightest Wall Street could hire — had mitigated risk to a fine puree. Which worked great until the last hairdresser bought her last $700K condo in Palm Beach, after which, not so much.

  2. Lloyd Morgan Post author

    Thanks for the comment, xtophr.

    I’m actually in the middle of reading an article discussing this point exactly, authored by Nassim Taleb. I’m only half way through so shall refrain from linking to it here: if the second half is as good as the first I’ll undoubtedly post it tomorrow.

    Thanks again.

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