New Paper from the PRMIA Institute: Parsimony - A Model Risk Paper,

I am very pleased to say that the PRMIA Institute has released an excellent new paper authored by Dr. Bob Mark and Gary Nan Tie.

I have known Bob for a very long time - reading The Essentials of Risk Management was part of my introduction to risk management - and he was even in China with me during my unexpected extra week there in 2017. I am hoping to meet Gary as well when we get out of these COVID-19 related travel restrictions.

The Paper

As I started to learn many years ago in my first finance classes at business school at Smurfit, models are representations of certain aspects of reality and as such are not reality itself. As I became a risk manager, I learned that this discrepancy is model risk - "the risk that behavior predicted by a model is divergent from actual behavior".

A parsimonious model choice embodies an "economy of conceptualization". We choose a parsimonious model in terms of only that which is needed to understand our problem and robustly extrapolate. By doing so, we better understand and mitigate model risk.

In the paper, the authors explore how to understand and mitigate model risk. Guidance is given on finding parsimonious models within a spectrum that neither under fit nor over-fit data in order to rationally and consistently make informed business decisions.

My Thoughts

I really enjoyed the paper - not only was it easy to read, it has some information in it that will be useful for anyone working in this area:

• An iterative learning process for modelling risk;
• Sources of model risk and their mitigation; and,
• Model risk for AI algorithms - most definitely an area people have been asking me about!

Getting the Paper

Sustaining Members of PRMIA are invited to download the paper here. If you are not currently a Sustaining Member and would like a copy of the paper, join now.

Not only will you get access to the paper, but you will get access to all the benefits listed above - I may be a volunteer leader in PRMIA, but like everyone else I pay my yearly subscription to help support PRMIA's mission.

Submitting your own Paper?

The PRMIA Institute recently closed it first call for papers. We received dozens of proposals and we are now working through these to prepare for a meeting of our editorial board.

However, with the recent release of the Risk Model Paper, I would say we are very interested in any other papers risk practitioners think would be relevant for their peers and that they would like to write and submit. You can find more information on how to submit here.