NYT article on quants, fractal risk

[free4now]

Interesting idea about risk, that feels very apropos today:

Dr. Taleb has waged war against one element of modern economics in particular: the assumption that price fluctuations follow the familiar bell curve that describes, say, IQ scores or heights in a population, with a mean change and increasingly rare chances of larger or smaller ones, according to so-called Gaussian statistics named for the German mathematician Friedrich Gauss.
But many systems in nature, and finance, appear to be better described by the fractal statistics popularized by Benoit Mandelbrot of IBM, which look the same at every scale. An example is the 80-20 rule that 20 percent of the people do 80 percent of the work, or have 80 percent of the money. Within the blessed 20 percent the same rule applies, and so on. As a result the odds of game-changing outliers like Bill Gates’s fortune or a Black Monday are actually much greater than the quant models predict, rendering quants useless or even dangerous, Dr. Taleb said.

Original article on "quants":
http://www.nytimes.com/2009/03/10/science/10quant.html?pagewanted=1&hp

I wonder if incorporating this idea into monte carlo simulations would improve their accuracy.

 

[al_bundy]

in the end it comes down to prudent lending

this decade i went from a 600 FICO to almost $100,000 in credit card limits in 2-3 years. for a while it seemed everyone was sending me a cc offer. now i have to call the poor banks and cancel most of my cards and screw up their bonds

 

[ERD50]

Taleb' books are fascinating, thought provoking reads. And I understand he's made a fortune recently, which makes sense based on his 'black swan' approach (higher than expected volatility should be a home run for him).

But if we enter a boring period, I think that just eats his profits. He should probably quit while he's ahead

-ERD50