Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

Chapter 4

Financial Risk Events

Stories of financial disasters hold a certain unseemly interest, even providing an element of schadenfreude for those in the financial markets. Nonetheless, there are real and substantive benefits to telling and hearing stories of financial disaster. First is the value of regular feedback on the size, impact, and frequency of financial incidents. This feedback helps to remind us that things can go badly; importantly, it can remind us during good times, when we tend to forget past disasters and think that nothing bad can possibly happen. This effect helps protect against what Andrew Haldane, head of financial stability at the Bank of England, has described as “disaster myopia”: the tendency for the memory of disasters to fade with time.¹ It is the “regular accurate feedback” that Tremper recommends as necessary for good avalanche decision making. It also serves “pour encourager les autres”—to encourage those who have not suffered disaster to behave responsibly.²

The second benefit is very practical: learning how and why disasters occur. We learn through mistakes, but mistakes are costly. In finance, a mistake can lead to losing a job or bankruptcy; in avalanches and climbing, a mistake can lead to injury or death. As Mary Yates, the widow of a professional avalanche forecaster, said, “We are imperfect beings. No matter what you know or how you operate 95 percent of your life, you're not a perfect person. Sometimes these imperfections have big consequences.” ...