When markets do not follow rules and have a high degree of uncertainty and complexity, more rules are needed by the investment manager to navigate the system. Markets do not have rules, you need rules.
This adage applies especially to risk management rules. In fact, the more uncertainty, the more risk management is necessary to protect against markets that do not follow rationality or any valuation models. Forecasting skill will decline if markets do not follow rules. Hence, there is a greater need for control of risks and the best method for risk controls is through imposing good behavior. This could be in the form of stop-losses, diversification, limits to drawdowns, leverage control, VaR modeling, or risk budgets. All will provide help when markets behave poorly.
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