Dealing with Uncertainty in Scenario Analysis: Stochastic vs. Deterministic Approaches

Hear from Ron Dembo, Founder and CEO of riskthinking.ai, as we apply stochastic thinking to the challenge of climate scenario analysis.

One of the most difficult aspects of managing climate risk is its inherent uncertainty. Because we can’t know with absolute confidence what our future climate, economy or society will look like, we therefore can’t know exactly when, where, or how intensely climate risks will manifest.

A technique commonly applied to this problem is scenario analysis. By building a picture of what the future might look like, firms can formulate risk management strategies appropriate for that scenario.

However, today’s guest believes we’re only scratching the surface of what scenario analysis can do for our financial institutions. In today’s episode, we’ll home in on the idea of stochastic scenario analysis; what it is, how it works, and what makes it different to the traditional approach to scenario analysis. We’ll explore:

·       The difference between deterministic and stochastic scenario analysis;

·       The advantages of using large sets of scenarios generated by expert judgment; and

·       What stochastic scenario analysis means for risk professionals.

 

To find out more about the Sustainability and Climate Risk (SCR®) Certificate, follow this link: https://www.garp.org/scr

For more information on climate risk, visit GARP’s Global Sustainability and Climate Risk Resource Center: https://www.garp.org/sustainability-climate

If you have any questions, thoughts, or feedback regarding this podcast series, we would love to hear from you at: climateriskpodcast@garp.com

Links from today’s discussion:

·       https://riskthinking.ai/

 

Speaker’s Bio

Ron Dembo, Founder and CEO, riskthinking.ai

Ron is an academic, author, entrepreneur, and consultant to the some of the world’s largest corporations and banks. He has had a distinguished academic career as a professor at Yale University and as visiting professor at MIT. He is a Lifetime Fellow of The Fields Institute for Research in Mathematical Sciences, and has received numerous awards for his work in mathematical optimization, finance, and climate change.

Ron was previously the Founder and CEO of Algorithmics, an enterprise risk management software provider with over 70% of the world’s top 100 banks as clients. After Algorithmics was acquired by Fitch Group, Ron later founded riskthinking.ai, a company pioneering the use of stochastic analysis to accurately price climate risk into the financial markets.