Stress Testing

Is everything going wrong in your life these days? You may be in a stress test simulator...yep, just another Black Mirror episode.

Stress testing is the act of using a computer simulation to test the resilience of something, such as an investment portfolio, an institution, a bridge, or even you. If you could design it and digitize it, you can stress test it.

Stress testing is a premortem technique: choosing to see all the worst-case scenarios before they ever happen, and seeing what could’ve gone wrong. From there, you can make adjustments in the present to avoid the worst situations, and increase your probability of more favorable outcomes.

In the financial industry, stress testing keeps lenders above water, since it helps them gauge risk. For brokers, stress testing shows the full breadth of possible returns based on theoretical scenarios of what could happen.

Regulators are fans of stress testing, too. With the increases in tech, they’ve required financial institutions to stress test their holdings and assets to certain standards, as a form of accountability. For instance, the 2010 Dodd-Frank Act put regulatory requirements on big banks to stress test their assets, since they definitely weren’t leading to the 2008 financial crisis.