Common errors in risk modeling

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This section describes, and provides examples for, the three most common mistakes we come across in auditing risk models, even at the more elementary level. These mistakes probably constitute around 90% of the errors we see. We strongly recommend studying them, and going through the examples thoroughly.

Common error 1: Calculating means instead of simulating scenarios

Common error 2: Representing an uncertain variable more than once in a model

Common error 3: Manipulating probability distributions as if they were fixed numbers