McNamara and model risk
Philip Delves Broughton notes that Robert McNamara, one of Harvard Business School’s most notorious graduates, basically did in the field of war what Wall Street quants did in the field of finance:
The journalist David Halberstam wrote that McNamara mistrusted people who did not speak his language of statistics and hard data. If it ever came down to one person saying something âjust didnât feel rightâ or that it âsmelled wrongâ, he would always go with his facts over their feeling. Fatally, in the case of Vietnam, the data he received was not accurate.
When Wall Street quants fail to account for model risk, they can end up losing hundreds of billions of dollars. But that’s an improvement over what happened when McNamara failed to account for model risk: those losses were much worse.