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Quote of the Week: Uncertainty Managers

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April 2, 2015

The vast majority of subprime credit and stock analysts never expected this abrupt shift in the ‘system’s’ behavior. An understanding of complex systems patterns might have allowed them to recognize the underlying pattern at work. Analysts who did so would not have merely avoided a potential problem: they would have gained an edge over the competition.”

Who said it: Diego Espinosa, founder of Sistema Research

In Context: There are a lot of ideas about how to improve the investment process to ensure returns and minimize losses. Diego Espinosa, a hedge fund manager who correctly called the 2008 subprime crisis, and founder of a strategic consultancy firm, argues that risk managers and risk analytics may be quite limited in their approach because they do not take into account surprise events or “infrequent calamities”. He invites investors to learn more about complex systems and the uncertainty principle which they exhibit. In his view, uncertainty can be managed. He says, “The goal is not necessarily to make big bets on still-uncertain outcomes. Instead, this scan-and-recognize approach allows analysts to track the evolution of a pattern in real time, to understand its behavior so that as data come in, the portfolio can adapt to possible outcomes.” It is not a prediction instrument but rather a tool that can give a competitive edge over peers that are not necessarily managing uncertainty, and it enables a better understanding of the interactions that influence investments. (Image source: Sistema)

Where we found it: CFA Institute

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