Caveat Numerus: How Business Leaders Can Make Quantitative Models More Useful

Abstract

Complex quantitative models are increasingly used to help businesses answer a wide array of financial problems. However, sophisticated models all too often overwhelm leaders’ abilities to understand and manage models. A critical problem is the bifurcation of business experience and quantitative modeling skills: Leaders with vast industry experience and wisdom often do not understand the models while quantitative modelers often have too little industry experience to know where the models might fail. This chapter presents a framework that allows leaders to not only understand but also be able to question and improve the quantitative analytics within their firms. In additional to the model risk management, the framework also helps the leaders to understand and critically evaluate the output from their firm’s models.