Financial firms need to radically change their analytical focus. They need to make the assumptions behind their models much more explicit and transparent. They need to incorporate the systematic monitoring of analytical models into their businesses. They -- and their regulators -- need to be skeptical about the ability to model and manage risk in extraordinary time.But, their "most important" lesson is directed specifically at management itself:
Financial executives need to learn much more about the models that are running their businesses. In search of outsized returns, they've taken on investment and debt securities that are bundled up in algorithmic combinations that they don't understand. Cowed by this accumulation of daunting numbers, these executives have abdicated responsibility for managing risk.