Knowing What We Don’t Know

Date: August 2024

It is essential to acknowledge the limitations of this training material. These limitations primarily arise from the author’s background and experience, which are largely confined to a single company operating in Southeast Asia and South America. Risk management is closely tied to business models and product design. Given the author’s limited exposure to other business models and product designs outside of Buy Now Pay Later (BNPL) and Cash Loans, the material may not be directly applicable to your situation. Furthermore, risk management is an evolving field, and the material may not reflect the latest trends and practices, particularly in the areas of machine learning, artificial intelligence, and causal inference.

Readers should exercise caution when applying this material to their own circumstances. It is recommended to approach the content with a critical mindset, considering the differences in business models, product designs, demographics, regulations, and the latest industry practices.

That being said, the author believes that The Art and Science of Decision Making and Fundamentals of Bonds and Interest Rates are universal concepts that apply across various business models and product designs.

Another significant limitation is the author’s limited knowledge about handling regulatory requirements.

The author still has questions about the following topics:

  • Definition of Risk: While common industry metrics are presented in Commonly Used Risk Metrics, why is risk typically defined as a ratio of loss to exposure? What is the fundamental meaning of risk?

  • Competitive Advantages of Loans: All loans can be defined by principal, interest rate, and maturity. If these three parameters are identical, what are the competitive advantages of one loan over another?

  • Application of Basel Accords in Credit Risk Management: The author acknowledges limited knowledge about Basel Accords, despite their importance in banks’ risk management.

  • Estimating Systemic Risk: Reflecting on Warren Buffet’s quote, “Only when the tide goes out do you discover who’s been swimming naked,” how can systemic risk be estimated?