Thread by @trengriffin

1/ "Value at Risk (VAR) is one of the dumbest ideas ever put forward." Charlie Munger

"Life in financial markets has no relation to standard deviation." Warren Buffett

Hedge funds "love them some standard deviations" tho:
msn.com/en-us/money/ot…

2/ The same false assumptions that underestimates stock-market risk, mis-price options, builds bad portfolios, and generally misconstrue the financial world are also built into the standard risk software used by the world's banks. The method is called Value at Risk." Mandelbrot

3/ "You have outlying phenomena you can't anticipate on the basis of previous experience." George Soros

"The precision that goes into saying this is two standard deviation or three and therefore we can afford to take this much risk and all that, it's totally crazy." Buffett

4/ "The defect of VaR alone is that it doesn't full account for the worst 5% of expected cases. But these extreme events are where ruin is found." Thorp

"The key hazard of quantative risk management is the illusion of control." Marks

"Beware of geeks bearing formulas." Buffett

5/ "A lot of the modern risk-management techniques created a totally false illusion of safety. The idea that by quantifying risk using a tool like Value at Risk that you can therefore control it is one of the slightly more ridiculous things to have come along in years." J Montier

7/ Wait!!!! Elon invites Vlad of RobinHood into extra time on a Clubhouse session tonight and he reveals that the early morning capital call for $3B from the clearinghouse was based on an opaque formula based in part on VaR and discretionary factors? What could possibly go wrong?

8/ Negotiations that followed the $3B capital call resulted in haircuts on that demand from the clearing house because, you know, the amount was discretionary and because VaR is a pretend system that doesn't map to reality as has been previously explained in this thread! Got it?

9/ Everyone knows that there's an important part of the financial system in place which relies on VaR, which ignores key financial risks, which has no circuit breakers, which can result in massive capital calls being made in brokers suddenly and without warning?

10/ It would seem like this problem could use some transparency and, you know, a margin of safety. The financial system is sort of important.

"In engineering, people have a big margin of safety. But in the financial world, people don’t give a damn about safety." Charlie Munger

11/ If financial system don't have a margin of safety about capital calls, the business better have one. So:

"(Dow Jones) - Robinhood Markets raised another $2.4B from shareholders."

"Cash is the equivalent of financial Valium. It keeps you cool, calm and collected.” Berkowitz