Are valuation and risk measurement models as the root of all evil?
In this crisis we witnessed a broken market. Financial institutions relaying on complex financial models for both valuation and risk management suffered heavy losses and saw their methodologies break before their eyes. Many valuation models and risk models literally stopped functioning and started spewing out numbers that seem to have no real connection with reality and stock market prices. Many investors and financiers alike are losing faith in what was once held high as the hope of objective decision making based on mathematical calculations. Math and numbers provided a sense of security and scientific aura to many managers who only recently learned of their limitations, the hard way. It is natural for us to assume complex equations and finance theory applied to the markets is much better than any subjective human judgment made. The model does over-estimate risk or influenced by market psychology. The model is no eager to sell on profit and is essentially not biased by any psychologi
