Risk, Model Risk, and Knightian Uncertainty: On the Role of Probability in Finance

12 May 2011
17:15
Professor Hans Föllmer
Abstract
In the Examination Schools. Over the last decades, advanced probabilistic methods have played an increasing role in Finance, both in Academia and in the financial industry. In view of the recent financial crisis it has been asked to which extent "misplaced reliance on sophisticated maths" has been part of the problem. We will focus on the foundational issue of model uncertainty, also called "Knightian uncertainty". This will be illustrated by the problem of quantifying financial risk. We discuss recent advances in the theory of convex risk measures and a corresponding robustification of classical problems of optimal portfolio choice, where model uncertainty is taken into account explicitly. Biography: Hans Follmer is Professor Emeritus of Mathematics at Humboldt-Universitat zu Berlin, Andrew D. White Professor-at-Large at Cornell University, and Visiting Professor at the National University of Singapore. Before joining Humboldt University in 1994, he has been professor at the universities of Frankfurt and Bonn and at ETH Zurich. Hans Follmer is widely known for his contributions to probability theory and mathematical finance. He received numerous awards, including the Prix Gay-Lussac/Humboldt of the French Government, the Georg-Cantor medal of the German Mathematical Society, and a honorary degree of the University Paris-Dauphine. He is a member of the Berlin-Brandenburgische Akademie der Wissenschaften, the German National Academy of Sciences Leopoldina, and the European Academy of Sciences Academia Europaea.