Value at risk is a technique for evaluating the riskiness of a portfolio that led people badly astray during the financial crisis in 2008. It would be a great tool if finance, the world of finance, would be predictable. But the real world of finance is not one of calculable risk. And we have seen that value at risk calculation have not prevented any crisis. We need to have simple methods that are robust.
Psychologist and author Gerd Gigerenzer of the Max Planck Institute for Human Development talks about his book Gut Feelings with EconTalk host Russ Roberts. Gigerenzer argues for the power of simple heuristics--rules of thumb--over more complex models when making real-world decisions. He argues that many results in behavioral economics that appear irrational can be understood as sensible ways of coping with complexity.