Taleb sides with Mandelbrot

November 11, 2007 at 4:46 pm 1 comment

On risk and financial models. It’s not a bell curve; it’s a power law. But bell curves rule and the models break in huge ways when a wave hits. Taleb got a lot of attention within and without and around the financial community for the article, which synches up with Benoit Mandelbrot (yes the fractal guy is still alive) and his book of a couple of years ago, Misbehavior of Markets.

One trader, in explaining what happened with his exposure to underlying risk in his subprime derivative, said he saw moves of 25 standard deviation points day after day as the shit hit the fan. Another said these were events that should happen once every 10,000 years. OR, maybe the model for risk is wrong. If our model for risk is wrong, we get 1987, we get this current crisis. Deep down, the world view is wrong. The wrong myth has been sold and bought as a uniformly applied tool by the “smart guys.”

It points out how biocomplexity, true ecosystem analysis is the only way forward, at least for me. All around us are wicked problems, demanding a new method of engagement and management, if solution is not in itself in the offing.

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Entry filed under: biocomplexity, risk model.

xigibiz blog moves hacking at the root level

1 Comment Add your own

  • 1. kevindjones  |  November 11, 2007 at 4:47 pm

    And, of course 1998, when long term capital almost sunk the market.

    Reply

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