Banks err by confusing risk, uncertainty

Banks err by confusing risk, uncertainty

Complex prediction models may have blinded financial institutions to looming meltdown

By Bruce Bower, 11:12 AM October 8, 2012

WASHINGTON — Major banks conduct an annual ritual of financial forecasting futility: Their complex risk models consistently flub predictions about the relative values of the dollar and the euro in the coming year, a new analysis finds.

Annual forecasts of currency values from December 2001 to December 2010, which guided banks’ investment decisions, badly missed the mark nine out of 10 times, says psychologist Gerd Gigerenzer of the Max Planck Institute for Human Development in Berlin. Banks in...

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