Theoretical limits to risk management models : model risk

• Main Author: Dos Santos, Marco Paulo Ferreira
• Published: 2015
• Subjects: Risk management; Risk perception; Business planning
• Online Access: http://hdl.handle.net/10210/14712

M.Ing. (Engineering Management) === This mini-dissertation provides an overview of enterprise risk management and its components, while focusing on risk analysis and risk models. Since all entities face uncertainty with respect to the aspects that they interact with, enterprise risk management aims to maximize value to stakeholders. One of the tools used in the risk assessment component of enterprise risk management is a quantitative assessment technique called risk modelling. Risk modelling allows various risks to be evaluated by observing their effects on simulation outputs. Decision making under uncertainty has become heavily reliant on risk models, resulting in more complex models being formulated and utilized. As such, the risks associated with the modelling of risks are becoming increasingly more pervasive in risk management and whose effects are just as severe (if not more so, due to their lack of awareness). A more in depth examination of model risk is performed and discussed in order to highlight its lack of awareness, extent and implications, and theoretical limits in risk modelling. Using this background information, the analysis of models used in literature for pricing in telecommunications wireless mesh networks is conducted in order to evaluate their model risks. This analysis shows that very few publications acknowledge the shortcomings of their models, let alone evaluate or discuss them in any way. Further, this analysis shows that some of the models and their assumptions produce pointless results. A simple investigation of the risks associated with their models would have produced results that are more conclusive and substantiatable, and with less flaws. Although the model risk analysis has been performed on models that simulate certain billing aspects of telecommunication wireless mesh networks, the model risk a alysiscan just as easily be performed on any other models or risk models. The aim of this mini-dissertation is to provide an overview of model risk and its impact, and also highlight the importance of including the management of model risk in the enterprise risk management process.