A great article about AIG reckless underwriting of credit default swaps. The article is a great illustration on the difference between risk and volatility. I have argued this difference in several posts and I still believe that a lot of investors, even professional, as illustrated by this article, confuse risk and volatility.
Several take away from the AIG case:
- Models do not articulate risk, they articulate volatility.
- Common sense and conservative policies go along way in protecting capital.
- Historical data should not be relied on for investment decisions entirely; it can always be manipulated to show whatever case you want them to show.
- Good and conservative management matter much more than assets and technology.
3 comments:
It's worse than that. An investment course I took at the local university actually taught that Risk=Volatility. Not just confused about what the difference might be, but actually teaching that there was no difference.
yes I forget all about academia. everything in finance courses revolve around Std deviation as measure of risk which completely absurd.
in this type of science, finance, I want to learn from practitioners like Buffet.
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