The Quant Model Problem
Episode description
Often we focus on models so much that we forget they aren't perfect. There is a strong need for a validation team to check the work of model development. However this leads to disagreements between teams. There are many factors that play into this which include technical limitations, limitations of employee education and experience, usage limitations, and ego. Quants make their money based on their intelligence. It is hard to admit you either made a mistake or do have the knowledge required to model a specific problem. Add on the requirement to do additional work and potential negative impacts to your promotions and bonuses and we end up in a hostile environment. These limitations are risks in themselves and should be viewed as part of model risk management's analysis.
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