Risk Models

It has been quite apparent to me that the ways used by Wall Street to model risk are seriously deficient. John Cassidy states the conclusions from his intended talk tonight on Rational Irrationality. The first person who discussed this stuff and totally blew me away was Nassim Taleb in The Black Swan and Fooled by Randomness (first published in 2004!). Yves Smith has an excellent discussion in Chapter 3 of Econned. Wall Street execs say well, it is a useful tool. This is total bullshit because it doesn't take into account fat tails. If you don't know what that means and care, do some reading. It is about statistics, so some mathematician can correct me if I am wrong.

I do not believe that with all the quants that big firms had employed they did not know this. However, you have to take into account that Black and Scholes who received Nobel Prizes (as my conservative friends point out, so did Barack Obama--I love the guy but Nobel Prize no way) based a hedge fund on these concepts (Long Term Capital Management) which blew up in 1998 and had to be rescued by the Fed. I imagine they ended up very rich despite losing all their clients' money.

I greatly enjoyed see the Goldman boys squirm today. These Wall Street guys make me sick. They were totally disingenuous. Great political theatre.