Today's top financial professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading--and puts everyone at risk. In Plight of the Fortune Tellers, Riccardo Rebonato forcefully argues that we must restore genuine decision making to our financial planning. Presenting a financial model that uses probability, experimental psychology, and decision theory, Rebonato challenges us to rethink the standard wisdom about risk management. He offers a radical yet surprisingly commonsense solution: managing risk comes down to real people making decisions under uncertainty.
Plight of the Fortune Tellers is a must-read for anyone concerned about how today's financial markets are run. In a new preface, Rebonato explains how the ideas presented in this book fit into the context of the global financial crisis that followed its original publication. He argues that risk managers are still stuck in a probabilistic rut, and need to engage with the structural causes of real events.
Riccardo Rebonato is global head of front-office risk management and quantitative analytics at the Royal Bank of Scotland. He is a visiting lecturer in mathematical finance at the University of Oxford and adjunct professor at the Tanaka Business School, Imperial College London. He has written many books and articles on finance.
"[Plight of the Fortune Tellers] is timely. . . . [I]t provides a relatively accessible guide to annoyingly influential statistical theories, and it makes you think."--Financial World
"A fascinating read. . . . Rebonato writes in an engaging prose that is free of mathematics, yet intellectually rigorous. He provides a top-level view of risk management, founded on real-world situations."--Philippe Jorion, Journal of Economic Literature
"[Plight of the Fortune Tellers] was written to appeal to a wide audience. Stylistically, Rebonato is an engaging writer who uses analogies and interesting examples...I'm confident you'll enjoy this book and that, after reading it, you will join in the dialog that Rebonato has started."--Garp Risk Review
"In his new book, Plight of the Fortune Tellers, Rebonato shows... why Merrill Lynch and Citigroup shareholders are right to be concerned. Nowhere have I read a better account of how a conscientious, intellectually disciplined market risk manager approaches his work in today's complex world. Well known to Risk readers as a master of interest rate modeling, Rebonato has written an accessible, non-technical book."--Nicholas Dunbar, Risk
Table of Contents:
Preface to the Paperback Edition ix
Chapter 1: Why This Book Matters 1
Chapter 2: Thinking about Risk 22
Chapter 3: Thinking about Probabilities 40
Chapter 4: Making Choices 67
Chapter 5: What Is Risk Management For? 107
Chapter 6: VaR & Co: How It All Started 117
Chapter 7: Looking Beneath the Surface: Hidden Problems 139
Chapter 8: Which Type of Probability Matters in Risk Management? 182
Chapter 9: The Promise of Economic Capital 199
Chapter 10: What Can We Do Instead? 223
Other Princeton books authored or coauthored by Riccardo Rebonato: