Ian Harris, The Z/Yen Group
Z/Yen Limited is a leading risk/reward management practice which has been a Berkeley Morgan client since Z/Yen were founded. Together with several prominent organisations including BZW, Sun Alliance and The London Stock Exchange, Z/Yen has formed the Financial Laboratory Club (F£C). The F£C consortium has recently won a £750,000 grant from the DTI as part of the Foresight Challenge to fund part of a two year research programme into virtual worlds for effective risk management in the financial services sector. Working with top defence scientists at DERA (the MoD’s Defence Evaluation and Research Agency), the F£C will adapt DERA’s leading edge computer models to the world of financial risk. This Foresight award has attracted a great deal of media interest, as many readers might have observed from the national press. Ian Harris, a founding director of Z/Yen and a personal finance client of Berkeley Morgan, explains what all the fuss is about.
Financial markets are sophisticated, so systems to manage risks in those markets need to be complex. They need to work in real time using massive amounts of data. They also need to be robust enough to protect a portfolio from catastrophic or malicious events. Although it is possible to simulate markets working on a day-to-day basis, it is extremely difficult to capture the impact of catastrophic change. To be truly valuable, however, a risk management system should give protection against such substantial changes.
The issues are further complicated by the human elements. Qualitative elements in markets (such as confidence levels, the perceived impact of world events) are introduced through human intervention. We know from research in human sciences that human behaviour tends to change significantly in stressful and risk sensitive environments.
The ideas for the F£C arose as so many brilliant ideas do during an informal dinner. On this occasion, the meal was between Michael Mainelli (Corporate Development Director of DERA and a Director of Z/Yen) and several senior figures from BZW.
Michael Mainelli picks up the story for a few moments, “we were discussing [the issues mentioned above] and I suggested that we should combine technology developed for defence with leading edge financial risk management techniques. Once we had spent a few minutes enjoying the entertainment value of this notion (the financial battlefield, trading rooms as control centres of armies, the lone trader as fighter pilot), we realised that we had hit upon something seriously interesting. Virtual reality, statistical and mathematical techniques, the psychology of individuals and of teams are just a few examples of areas with significant common ground between the defence and finance worlds.”
“Further, we have a vast pool of know-how and resources available through DERA which could and should be used for our economic well-being as well as defence purposes. Such resources include the largest super computing facility in Europe and virtual reality facilities.”
The outputs of this two year research programme will include standards in risk visualisation, operational analysis and game theory, ergonomics and trade modelling, human machine interface research and models for group decision heuristics. The programme should result in the UK achieving world-wide intellectual leadership in risk management techniques and applications. As Michael Mainelli puts it “This consortium and Foresight funding will allow us to turn our vision into reality or at least virtual reality.”