2019 5th International Conference on Economics, Management and Humanities Science (ECOMHS 2019)Analysis of Decision Value of Financial Risk Quantitative ToolsJingyi LiuHunan University of Commerce, Changsha, 410200, ChinaKeywords: Financial risk; Quantitative tools; Decision valueAbstract: Financial risk quantification tools have become the mainstream tool for financial riskmeasurement and management. With the innovative construction of China's multi-level capitalmarket system and the gradual improvement of financial system functions, financial risks presentsome new uncertainties. Taking effective tools to quantitatively analyze and manage the risks ofChina's financial market is conducive to fully improving the decision-making value of financialpolicies. This paper demonstrates the inherent drawbacks of financial risk quantification tools,combined with the characteristics of risk decision-making, and demonstrate the value of financialrisk quantification tools in the field of decision-making.1. IntroductionAs a result of the promotion of global regulatory agencies, the quantitative analysis method offinancial risks has been widely studied, accepted, absorbed and applied to its own managementactivities by global financial institutions. It has become an important measure for financialinstitutions to improve their management level and enhance their brand image. Financial riskquantification tools Due to certain standardization model scenarios, there are also some drawbacks.These are the factors that we should consider when making decisions based on this tool.2. Quantitative analysis2.1 Misunderstanding of expectationsExpectation is an extremely important concept in the statistical analysis of risk-basedquantitative analysis. However, what exactly is expected? What is the expected loss of a creditportfolio in credit risk management? An identical credit portfolio, for two financial institutions withdifferent operating capabilities and different operating styles, the expected losses may be quite Bigdifference. If this expectation is not a stable and reliable existence, why can we use it to measurerisk? First, the expected value expressed in historical data is not a completely objective existence,but is generated by the active participation of managers at that time. the result of. The expectedvalue of historical data contains the management process of people at that time. As today's risk taker,we can't simply take the expected value of historical data as an objective existence. Logicallyspeaking, our risk management ability must at least reach the average level of the former managers,in order to control the risk to historical expectations. Second, history cannot be repeated, butdecisions must be geared towards the future. Objectively speaking, the external environment andthe risk operation mechanism have undergone tremendous changes, so as today's decision makers, itis impossible to repeat the past decision-making behavior. Logically, a risk strategy that matchesbusiness strategy is difficult to generate based on historical imagination and simulation. Therefore,the expectations discussed in the risk management theory are not the most likely conditions in thefuture, nor the average of the possible future conditions, but the statistics of historical results. It isthe historical average result of a certain period, a certain range, and a certain environment. reflect.This “expected” concept is not suitable for direct risk decision making beforehand, but is suitablefor post hoc risk level assessment.Copyright (2019) Francis Academic Press, UK1029DOI: 10.25236/ecomhs.2019.219
Historicalaverage resultsfor a certainperiod of timeHistoricalaverage resultof a certainenvironmenta range ofhistoricalaverage resultsExpectedformationFig.1. Expected formation factor2.2 Limitations of the modelThe construction of the model is the core of the entire risk quantitative analysis. However, theaccuracy of the model has always been questioned. First of all, the model is the abstraction of thereal world. The information simplified by the model often implies the source of value. For example,the long-term gap model usually ignores the basis risk. The market effectiveness model usuallyignores the information asymmetry and the human non-economic. The company value modelusually ignores the influence of the strategy's selectivity on the company's value. The informationthat these models simplify is often the value. Risk management can't rely on the model, but it can'tbe completely swayed by the model. Risk management based solely on the model is not only likelyto ignore potential risks, but is also more likely to keep pace with business innovation due toself-limited thinking patterns. Secondly, the posteriority of the model determines the finiteness of itslife cycle, and the solidified model is difficult to reflect the ever-changing real world. The model isa simplified description of the real world and is an approximate mirror image of the law of marketoperation. The higher the approximation of the model to the real market operating law, the moreeffective the model is. However, it is inevitable that the variability of the real world is outside themodel, and the stability law described by the model will gradually weaken or even lose itseffectiveness in the face of changing markets. In addition, the existence of complex interrelatedrealities in the real world also makes the self-contained model tend to ignore potential relatedfactors, which have become increasingly important in this increasingly connected world.2.3 Imperfect assumptions of "rational economic man"As the main body of economic activities, people play a key role in economic decision-makingactivities. The assumption of “completely rational economic man” truly reflects people'sself-interest, but the economic decision-making process is far more complicated than such ahypothesis. The influence of human feelings and emotional reactions on economic decision-makingis crucial. It is an important decision-making variable that is difficult to capture by quantitativeanalysis. People's subjective, emotional, subconscious driving and other reasons determine that theeconomic decision made by "people" cannot be completely rational. For example, for the sameeconomic outcome, people's feelings and decision-making motives will pay more attention torelative results than absolute results; people's current feelings should be far more intense for thefuture; the pain caused by losses is far more profitable. These differences in subjective feelings andemotions determine that if you rely solely on quantitative analysis, the observation of economicprocesses must be rough and simplified; if you rely solely on models to guide decisions, it may bepassive and arbitrary. People are the main body of financial decision-making. Therefore, in the1030
decision-making process, risk managers should consider how to link management actions withcustomer decision-making patterns, and consider what their potential decision-making drivers are.This requires managers to have a more detailed understanding and a more subtle grasp of themarket.3. Quantitative analysis in risk decision making3.1 Risk decision begins with expected managementFirst, expectation management is a matter of choice. Statistical expectations are based on theresults of average data across time, across cycles, and across industries, while aggressivedevelopment strategies cannot be limited to historical averages and should focus on the future. Asthe main body of free competition in the market, we are not likely to win an average. The customergroups selected by financial institutions are biased, and their own risk management capabilities arenot necessarily in the industry average. From a future-oriented perspective, the starting point forrisk decision-making should first be the real predictable target of the financial institution. Whichkind of customer group is this expected target located in the market? What kind of business modelis needed to achieve such an expected goal? What kind of risk strategy needs to be implemented?This expectation is the “initial heart” of business development. When it comes to riskdecision-making, it is the risk appetite of management. The first thing that risk appetite needs tosolve is the trade-off problem, which is not all-inclusive. Around this starting point, through thetransmission of risk appetite, construct an internal management ecology that realizes “expectation”,which is the starting point for the sustainable development of financial institutions. Second,expectation management is a boundary issue. Market research has found that although the expectedchanges may be large, the expected changes in volatility are relatively stable. The core of riskmanagement is the management of uncertainty. Relatively stable volatility provides a relativelyreliable measure of uncertainty for risk management, and this metric provides a good reference forsetting up the boundary of risk management. It is based on this understanding that internationaladvanced financial institutions usually determine risk preferences based on statistical understandingof uncertainty and their own tolerance. When choosing a “biased” expectation, it makes sense to setthe tolerance bottom line with reference to the volatility of historical data.how to chooseExpectedmanagementHow to clarifythe boundaryHow to performFig.2. Expected management3.2 Risk decision-making depends on data-drivenThe development of big data technology has made decision makers no longer forced to accept a1031
simplified model framework. The traditional quantitative model is the abstraction and simplificationof the real world, which is largely due to the methodology of traditional research, that is, hypothesis,data validation, and explanation of causality. In this research path, the concept precedes thephenomenon, and the concept proves its description and understanding of reality through the model.The use of big data analysis methods allows people to directly describe phenomena without concept.That is, phenomena precede concepts, models break away from causal constraints, and move towarda panoramic description of the real world, which will greatly expand decision makers. The attitudeof decision makers is the premise that data plays a decision-driven role. When the concept precedesthe phenomenon, the subjective experience takes precedence over the quantitative model, and thedecision maker may make decisions based on his experience and the results of the individual'sintegration of information. Data-driven risk decisions first require managers to put down their ownconcepts and choose to give up when data is not supported. This requires a whole set of corporateculture changes, changing the tendency to take measures with intuition and instinct alone, andrepeatedly demonstrate the feasibility of decision making through data in the decision-makingprocess. One of the successful experiences of Wells Fargo's small and micro business is to build theability of data analysis and implementation as a core operational capability, outsourcing a largeamount of accounting processing, text processing, etc., but operating data analysis as its corecompetence, so its Most of the senior management has a statistical background and excellent dataanalysis capabilities. It can be said that the success of Wells Fargo's small and micro business is atypical case of data-driven decision making.Methodology oftraditionalresearchproposeassumptiondata verificationExplain cause andeffectFig.3. Path of traditional research3.3 Risk decision-making focuses on value growthFrom the narrow “economic man” assumptions of customers, we can find a point of growth invalue between the “needs” of customers and the “wants” of financial institutions. What needs to berealized is that the customer is not pursuing the maximization of simple economic benefits, but thesatisfaction of self-demand. Understanding the needs of customers only from an economicperspective will inevitably fall into the trap of price wars. For example, data analysis shows thatcustomers who use different channels (counter, online banking, mobile phone) are more sensitive toprice and different needs for product diversification. Physical outlets attract counter customers, andthe potential for cross-selling is relatively weak. The price is relatively passive. The difference isthat the demand points of different customer groups are different, and different channels lockdifferent customers. Second, recognizing the non-economic nature of customers, it is possible toexploit the potential business value of marketing activities for commercial financial institutions.Marketing activities are not a simple means of raising awareness, but a subtle choice of customersand guiding customers' business processes. For example, providing relatively few products can helpimprove the actual purchase rate of customers and provide products with comparative differences. It1032
is conducive to improving the selection rate of intermediate products, giving customers benefits in asmall amount and multiple ways is more conducive to improving customer stickiness, and so on.Business decision-makers clearly understand and take the initiative to stay away from thebehavioral orientation of “non-economic people” in order to focus on real value growth. Startingfrom the subjective feelings of human beings, for the same economic value, the current interests arehigher than the future interests, the pain of loss is higher than the happiness of profit, and the samefeeling affects the behavior mode of business decision makers without exception. Good managerscan recognize and correct such subjective feelings and return to the real path of value growth.Secondly, choosing a business model with a long-term perspective can help managers to get rid ofthe narrow vision of financial profit, and help managers focus their attention on value growth anddecision-making from a value perspective. The value of the business, the value of the product is notthe current financial profit, but the present value of all possible future profits. If the financialinstitution breaks away from the long-term perspective of “value” to tap the current financial profit,it is likely to win the present, but lose the future. When the interest rate level is lower than 10%, inthe face of today's 100 yuan profit and the future profit of 10 yuan per year, the decision makerswho obey the inner feelings will choose the former, and the rational decision makers who are"economic people" will choose the latter. In the management of commercial financial institutions,risk decision-makers should pay attention to the impact of the “human” variable in economicactivities.4. ConclusionFinancial risk quantification tool, as a tool for assessing financial risk, has its inherent limitationsas a tool. When making risk decision-making, it must pay close attention to t
Analysis of Decision Value of Financial Risk Quantitative Tools . Jingyi Liu . Hunan University of Commerce, Changsha, 410200, China . Keywords: Financial risk; Quantitative tools; Decision value . Abstract: Financial risk quantification tools have become the mainstream tool for financial risk measurement and management.