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Model Risk & Validation

It’s reality that’s broken at the moment, not necessarily the models!

I want to push back on this seemingly obvious concept that I’ve seen quite often in recent months. The attached article is only one of many examples.

Let’s be clear: It’s reality that’s broken at the moment, not necessarily the models!

Many of the models in place late last year were perfectly fine then and will be perfectly fine again one day.

It’s also true that many models were not very good in December 2019 and they’re still not very good today.

It may be hard to determine which is which at the moment.

We’re currently in an unusual period so models that normally work well are currently predicting poorly. We just have to hunker down and try to limit the damage.

A couple of aphorisms for you to chew on:

Don’t recalibrate your wind sock in the middle of a hurricane.

If the power goes out during a storm, buy a generator, don’t re-wire the house.

#modelriskmanagement#modelrisk#creditrisk

https://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/leaderships-role-in-fixing-the-analytics-models-that-covid-19-broke?cid=soc-web

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