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Bob Litterman

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61
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2020-06-15
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2020-06-15
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  1. “Here of daily moves in XYZ. So I have a full distribution. In climate, we're doing this experiment for the first time. We don't have a distribution to look at. So there is tremendous uncertainty. And I got kind of stuck into this climate thing because I thought what we have to do is very obvious we have to price the risk. And I remember one of my colleagues saying to me, well, Bob, you know, that's a brilliant insight for an economist, but no one has a clue where to price the risk. And I thought, wait a minute, that can't be true. I'm an economist. I can read the literature here. There's got to be someone who's thought about this seriously. There must be, we must have a clue. So I kind of got sucked into that literature and eventually ended up building my own model because I wasn't happy with the models that were out there. They didn't use the appropriate, I would say, discounting, something that's essential.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “And then the last one that I would focus on, which is really key too, is that risk, and often economists make this distinction between risk and uncertainty. And when you make that distinction, we make it a lot in the financial community. Risks are things that we can measure, like volatility or value at risk. We report on them, their metrics. But what we manage is something much more uncertain. The models that we use, any metric like risk. Risk is a metric comes from a model. And it makes certain assumptions about how the past will be guide to the future. But those models are always inadequate. They're always approximations and the real world is always much more complicated. We don't really trust our models. And similarly with respect to climate, we're actually much more with respect to climate because at least in our models, we can say, well, we've got a 10-year history.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Have enough time, you can solve virtually any risk management problem. It's when you run out of time. One of my colleagues at Goleman, I was with him when we were talking to a hedge fund group, and he used a phrase that I found very enlightening. He said, you know, you get time compression. And that's when you run out of time to solve a problem. And indeed, I've seen that. I've experienced that. And Goldman, when I headed our Quant group and the whole Quant space melted down, we thought we would have months to get out of positions. And all of a sudden, we had days or hours. It was a realization there's nothing we can do here. And so the urgency of the climate crisis is really because it is a risk management problem and we don't know how much time we've got. And if we don't get started in time, we're not going to be able to solve the problems. So that's another one.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Worst case so much because that's in many contexts that's not defined. I remember early on Goldman asked me to think about how much we could lose in our swap portfolio. Well, there's no upper bound. There's really no number. I can't say we're not going to lose more than X because then you can. So in the financial markets, we usually talk about extreme but plausible scenarios. And that's a good way of thinking about climate risk. What are the extreme but plausible scenarios? But more generally, you have to think about that full distribution of outcomes. Typically, we don't. It's very scary in climate when you think about worst cases that are plausible. And it's not alarmist. That's just what risk management is about. And then a third lesson that I think is really key is that time is not on our side. And the way I think about it is that if you have”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “The first thing, you know, when you're thinking about risk and return on Wall Street, you're always balancing those and building portfolios of stocks or bonds or credit loans, you know, whatever it is, we think about are we getting paid appropriately for the risks that we're taking? And that's one of the key lessons. At Goldman, we made a lot of money from taking risk. And when they asked me to be head of risk management, it wasn't because Goldman Sachs wanted to reduce its risk. They wanted to make more money from the risks that they were taking. And if we were taking risks that we weren't getting paid for, we should identify those and hedge them, get rid of them. So similarly, you know, at the heart of climate is the fact that we're not pricing the risk appropriately. So that's one lesson. Another lesson that's very clear is that you have to think about worst case scenarios. Or in the financial community now, we don't really talk about.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “I never heard back from that headhunter, but then later I got another call, and that time it was more of a quant job, and I ended up going to Goldman Sachs and started in fixed income research, building models there. And then early on, Goldman asked me to get involved in risk management, which was kind of a new area. And they asked me to be head of risk management, which was a part and level position. And I did that for four years. And then they asked me to move to asset management. So I did that and ended up heading the Quant Group in Asset Management. And I was very pleased to do that for about 10 years.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Actually, it was kind of funny now that you asked because the first call, I had no clue. I didn't know what a headhunter was. It turned out it was a headhunter who was looking for a chief economist. As she said, in a major Wall Street firm, and I was a young Fed economist, I wasn't qualified to be like the economist at a major firm, but someone thought I was. And I said, well, you know, it would take six figures. You know, I was not making six figures at the time. But what I didn't realize is that was multiple seven figure job. So I clearly indicated that I had no idea what, you know, this was about.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “I'm an economist, and my early career, I taught at MIT, and then I went to the Federal Reserve Bank. I was an economist there, and I thought that was going to be my career, but this is in the mid-80s. One day I got a call from the headhunter. I didn't even know what a headhunter was, but the next thing I knew, I was a young quant on Wall Street in the early days of financial engineering. And gosh, I was like a kid in a candy store. There were so many interesting problems”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “I recently got involved with the Alliance for Decision Education, an educational nonprofit dedicated to the belief that better decisions lead to better lives and a better society. The alliance is building a national movement to ensure decision education is part of every middle and high school student's learning experience. I wish I had learned the science of decision-making back then, and I'm keen to spread the word and do my part so that my kids and yours learn to make better decisions throughout their lives. To learn more and join me in this movement, visit alliance for decisioned.org. That's alliance for decisioned.org. Please enjoy my conversation with Bob Litterman. Bob, great to see you.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “That we must slam on the brakes immediately to address global warming. We then turn to his work on policy to implement his conviction and his activity in the public markets across the World Wildlife Fund's stranded asset swap and his research at Kepos to play a rapid adoption theme from the lens of a quantitative investor.”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “My guest on today's show is Bob Litterman, a founding partner and chairman of the Risk Committee at Kepos Capital. Prior to Kepos, he spent twenty three years at Goldman Sachs, where his roles included heading the firm wide risk function and heading the quantitative investment strategies group at GSAM. Bob was one of the original inductees into risk magazine's risk management hall of fame and is well known for co-developing the Black Litterman Global Asset Allocation Model with the late Fisher Black. After leaving Goldman in 2009, Bob became fascinated by the risk management problem posed by climate change, and that is the focus of this third episode in Sustainable Investing, the next Frontier. Our conversation covers Bob's background in quantitative research, applying risk management principles to address climate change, modeling the price of carbon emissions, and concluding”

    2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source