The Known, the Unknown, and the Unknowable in Financial Risk Management

By Francis X. Diebold, N. Doherty, R. Herring. 2010

110 citations recorded by the source corpus.

A clear understanding of what we know, don't know, and can't know should guide any reasonable approach to managing financial risk, yet the most widely used measure in finance today--Value at Risk, or VaR--reduces these risks to a single number, creating a false sense of security among risk managers, executives, and regulators. This book introduces a more realistic and holistic framework called KuU --the K nown, the u nknown, and the U nknowable--that enables one to conceptualize the different kinds of financial risks and design effective strategies for managing them. Bringing together contributions by leaders in finance and economics, this book pushes toward robustifying policies, portfolios, contracts, and organizations to a wide variety of KuU risks. Along the way, the strengths and limitations of "quantitative" risk management are revealed. In addition to the editors, the contributors are Ashok Bardhan, Dan Borge, Charles N. Bralver, Riccardo Colacito, Robert H. Edelstein, Robert F. Engle, Charles A. E. Goodhart, Clive W. J. Granger, Paul R. Kleindorfer, Donald L. Kohn, Howard Kunreuther, Andrew Kuritzkes, Robert H. Litzenberger, Benoit B. Mandelbrot, David M. Modest, Alex Muermann, Mark V. Pauly, Til Schuermann, Kenneth E. Scott, Nassim Nicholas Taleb, and Richard J. Zeckhauser.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/457747f2ab34dabaec21c0b8a8d3a1ddac7c5507

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Citations in the corpus

Statistics and Quantitative Risk Management for Banking and Insurance (2014, background): “We will not enter into the, very important, discussion around “Risk and Uncertainty” (Knight (1921)) on the various “Knowns, Unknowns and Unknowables” (Diebold et al. (2010)).”
Risk and Uncertainty Communication (2017, methodology): “Perhaps the simplest three-level categorizations have been provided by Donald Rumsfeld’s (much derided at the time) “known knowns, known unknowns, and unknown unknowns” (Rumsfeld 2002); known, unknown, and unknowable in economics (Diebold et al. 2010); or simply risk, uncertainty, and ignorance.”
Managing the Unknowable (2015, background): “…than simply facing decision contexts in which probabilities are unknown (e.g., Knight, 1921), angel investors face the types of ‘‘unknown unknowns’’ (Diebold, Doherty, and Herring, 2010) that include both uncertainty and noise due to a large amount of unsystematic risk and conditions of…”
Planned Luck: How Incubators Can Facilitate Serendipity for Nascent Entrepreneurs Through Fostering Network Embeddedness (2020, background): “As we discuss, facilitating and incentivizing the (yet) unknown is different from traditional risk-management approaches, which tend to try to predict, manage, and minimize risk (Diebold et al., 2010).”