Risk Management & Psychology

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Investors exhibit loss aversion : They put more weight on the pain associated with a loss than the good feeling associated with a profit.

Often what investors want to know is not just how much an asset deviates from its expected outcome, but how bad things look way down on the left hand tail of the distribution curve : Value at Risk.

Value at Risk or VAR attempts to provide an answer to this question. The idea behind VAR is to quantify how large a loss on investment could be with a given level of confidence over a defined period.  Fo

The confidence level is a probability statement based on the statistical characteristics of the investment and the shape of the distribution curve. Of course even a measure like VAR doesn’t guarantee that 5% of the time will be much worse.