Managing Uncertainty, Mitigating Risk ― Tackling the Unknown in Financial Risk Assessment and Decision Making

Risk management as a discipline is evolving, evolving to deal with fat tails, evolving to deal with macro-economic drivers and basic forms of nonlinearity. And yet, financial risk management remains limited to the confines of quantification, forced to use the crutch of mathematical models. The fact that financial risk management relies so heavily upon mathematical models and quantified probabilities makes it bear little semblance to risk management in other applications such as process risk, environmental risk , operational risk and disaster planning, where in many cases possibilities are addressed and probabilities remain indeterminate.

This book proposes that financial risk management broaden its approach, maintaining quantification where possible, but incorporating uncertainty. The author shows that by using broad quantification techniques (reasonable possibilities, and inexact probability as opposed to absolute and uniquely quantified figures), and using reason (based on experience, inferences etc.) as the guiding principle, practitioners can see a more holistic and complete picture. Crucial in this approach is the development of scenario analysis, requiring input of traditional functional areas within the business, legal, and accounting departments. While the outcomes may not be certain, we can foresee a possible range of outcomes. The scenarios will take into account the reactions, responses and interdependencies of various economic stakeholders: consumers, corporates, banking, markets, governments, policy makers. However, unlike most approaches to macrofinancial analysis, overly reliant upon models, the author's approach focuses on the ability of stakeholders to alter the interdependencies between themselves, effectively changing the rules of the game.

Dr Nick Firoozye (London, UK) has experience in a variety of research and trading roles in buy-side and sell-side firms including Deutsche Bank, Goldman Sachs, Lehman Brothers, Citadel and Sanford Bernstein. He is known for his work in Quantitative Strategy, in particular, with emphases on relative value and statistical arbitrage. Dr Firoozye is a Managing Director and Head of Derivatives Research at Nomura International and leads a team in developing trade ideas and systematic strategies for global cross-product derivatives. Previously, he was head of European rates strategy at Nomura, extensively covering the Eurozone crisis and rescue packages and possible break-up. This included working closely with and advising Nomura's risk management team during the height of the crisis, together with the legal team. Dr Firoozye was an Assistant Professor of Mathematics at the University of Illinois, and holds a PhD in Applied Mathematics from New York University, and a Bachelor of Science in Mathematics from Harvey Mudd College. He is a frequent writer and speaker on financial markets and economics issues, and was co-author of a paper shortlisted for the Wolfson Economics Prize.

Fauziah Ariff (London, UK) comes from a background in management consulting and business strategy with a career encompassing KPMG, and Ernst and Young, with management roles in international private equity and in American Express' online development and IT. Her experience involves financial and market assessments, strategy implementation, and new business development, set up and acquisition. In her role in American Express, Fauziah developed several business method patents and a number of dependent claims, which strategically delimit and protect a key part of the company's rewards strategy. Fauziah has a Masters in Business Administration from Northeastern University and a Bachelor of Arts in Economics from University of Southern California.