Black Swan author on the limits of statistics

Turkey -- day 1002

Turkey -- day 1002

An excellent and accessible on-line article by Nassim Taleb (author of The Black Swan) about how to protect against improbable events.  It is always refreshing to see a stats expert warning of the discipline’s limits. 

A lot of his focus is on the current financial mess, which of course has at least some of its roots in the misuse of statistics.  Even worse, when everyone uses the same half-baked statistical analyses to assure themselves that there is little risk, they are unknowingly and unwittingly increasing the likelihood and magnitude of the pesky risk events. 

Taleb also has a way with the colorful metaphor:

A turkey is fed for a 1000 days—every day confirms to its statistical department that the human race cares about its welfare “with increased statistical significance”. On the 1001st day, the turkey has a surprise.

On the reckoning in high finance

I rarely comment on the politico-economic environment — my politics being somewhat imperial and hard to translate to the current age.  Yes, imperial, as in Roman imperial… my idea of the “good old days” is here :-) 

However, Bill Taylor’s post (here) brought this silverback out of the trees.  I can understand the anger, but why is everyone “shocked… shocked” when the gamblers scatter after yet another bust following yet another Fed-driven boom?  (BTW, a pretty good summary is here.)  I mean, who gets first dibs on Fed financing?  Well, financial institutions, of course.  It should be no surprise that the financial industry in its various guises (including real estate) will always be the prime boomer and buster in a credit-fueled expansion.

It is also no surprise that Wall Street attracts the many of the best and brightest (irony alert, see here).  Combine the allure of a high-stakes game with the lure of trying to figure out how to make it “different this time” and who could resist?  Sadly, too many couldn’t… Continue reading

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