Risk managers armed with the most sophisticated quantitative tools available did not foresee the biggest development in a generation — the systematic breakdown and global contagion of financial markets. In an interview with Knowledge at Wharton, John Drzik, president and CEO of the Oliver Wyman Group, Richard J. Herring , a finance professor at Wharton, and Francis X. Diebold , a Wharton professor of economics, finance and statistics, discussed how to build a more informed risk management model. All three took part in the recent Wharton Financial Institutions Center and Oliver Wyman Institute 12th Annual Financial Risk Roundtable 2009.

An edited transcript follows:

Knowledge at Wharton: Today we’re speaking about risk management with Wharton professors Dick Herring and Francis Diebold, and also with John Drzik, who is president and chief executive officer of Oliver Wyman Group.

I want to start with a very simple question.…