Risk Mismanagement:

Even tough value at risk is a valuable tool to assess risk of a trader’s portfolio, it only works when the market it behaving normally. Now risk managers cannot use VAR because of the current market fluctuations. Thus, risk managers cannot use the main tool that they have relied on for the last 10-20 years or so. The risks that VAR measured did not include the risk of a financial meltdown, which was the biggest risk of all.

David Einhorn states “VAR is a relatively useless as a risk management tool and potentially catastrophic when its use creates a false sense of security among senior managers.” Companies in the future should not rely so heavily on VAR to check its risky investments. They should use other methods, and then use VAR as a final check to evaluate their position.
The keyword here is risk itself, nothing is really risk free when there are so many complexities of the market. After all markets could change daily in how efficient they are, which effects how normal they behave. With all this training we are taught to look for inefficiencies of the market, and capitalize on them. So if just about everyone is looking for these, it is hard to say that the market is truly behaving “normally.”

Links:http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=2&emc=eta1