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Communicating Trading Risk Through Public Understanding and Systemic Measures

Article Quant Q&A · Author: vonjd
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Summary

The discussion asks how to explain potential losses and drawdowns from trading strategies and derivatives in ways clients can understand. It distinguishes the challenge of communicating risk from the separate task of calculating it, and points to work on explaining uncertainty to non-specialists as a useful model for clearer risk presentation.

Other suggestions include examining system-wide risk measures, such as those developed by NYU’s V-Lab, rather than focusing only on the risk of an individual portfolio. A practical answer is to describe losses in direct, portfolio-specific terms that clients can interpret. The document offers examples of directions to explore, but no proposed visualization, ratio, or tested communication method. It therefore serves mainly as a set of starting points rather than evidence that any particular approach improves understanding.

Key ideas

  • Risk communication for trading strategies should make potential losses and drawdowns understandable to clients.
  • Work on public understanding of risk offers ideas for explaining uncertainty to non-specialists.
  • Systemic risk measures examine risk across the financial system rather than only within one portfolio.
  • The discussion suggests simple portfolio-specific explanations but does not evaluate a particular format.

Tags

Risk management
Full text
# New ways of communicating risk


# New ways of communicating risk












One of the scapegoats of the financial crisis was value at risk. Still communicating risks effectively to clients is a big challenge and hugely important (also to keep your job as a quant!) In this question I am talking mainly about potential losses and drawdowns of trading strategies and derivatives.

My question Do you know innovative (or experimental) ways of communicating risk? These can be new ratios or visualizations or animations or .... Also unconventional ideas are welcome! The more intuitive these new ways are the better! If possible please give examples and/or references.

## Answer by Celeste (score 5, accepted)

https://quant.stackexchange.com/a/17596

Try to give David Spiegelhalter a read/listen to David Spiegelhalter's work and research. He is a statistician and a Professor of the Public Understanding of Risk at Cambridge England.

Rather than new ways of calculating risk, he looks at ways of communicating risk to a general public that doesn't have any knowledge of stats. I Linked an interesting video-lecture right below.

Professor David Spiegelhalter: Communicating risk and uncertainty

## Answer by nbbo2 (score 1)

https://quant.stackexchange.com/a/18141

The work of the NYU V-Lab is interesting to me. They try to measure risk in the system as a whole "systemic risk", rather than risk in a single portfolio.

## Answer by Riser (score -4)

https://quant.stackexchange.com/a/18139

communicate risk in terms of loss to a given portfolio in simple terms so that ANY client would understand.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.