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What Academics Think About Financial Risk Management

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This news article originally appeared on on 4/7/2010.

A new research paper from Contango Capital Advisors examines the shortcomings of academic thought in developing models that can be used by financial institutions to institute effective enterprisewide risk management systems and policies.

In “Economists’ Hubris–The Case of Risk Management,” Shahin Shojai, global head of strategic research at Capco, and George Feiger, chief executive of Contango, conclude that most academic models fail when put under the microscope, and that the development of effective models is a long way off. But no matter which models are used, the authors say, the current IT and operational infrastructures of banking institutions do not allow management to obtain a holistic view of risk. As a result, the silos they reside in means that instituting an effective enterprise-wide risk management system is today “nothing more than a panacea.”

Shojai and Feiger say the main concern is not only the academics who fail to realize this, but also that practitioners believe these models work even when they lack a holistic view of the risks within their organizations. In an abstract of the paper, the authors say: “We can state that this is the first paper in which we highlight not only the hubris exhibited by economists but also the hubris of practitioners who still believe that they are able to accurately measure and manage the risk of the institutions they manage, monitor, or regulate.”

Shojai and Feiger’s new paper is the third in their economists’ hubris series. Previous articles examined whether academic contributions in the areas of mergers and acquisitions and asset pricing were of practical use.

Michael S. Fischer ( [email protected]) is a New York-based financial writer and editor and a frequent contributor to Wealth Manager.


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