Black swan is a myth. It was Washington & Wall Street

http://ftalphaville.ft.com/blog/2009/09/09/70921/the-black-swan-battle-is-about-to-begin/ The term “model” as it applies to finance can be a simulation of reality in terms of predicting future financial outcomes. The author Nassim Taleb, who is appearing at this hearing, says the term “VaR” or value at risk describes a statistical estimate of “the expected maximum loss (or worst loss) over a... [more]

http://ftalphaville.ft.com/blog/2009/09/09/70921/the-black-swan-battle-is-about-to-begin/ The term “model” as it applies to finance can be a simulation of reality in terms of predicting future financial outcomes. The author Nassim Taleb, who is appearing at this hearing, says the term “VaR” or value at risk describes a statistical estimate of “the expected maximum loss (or worst loss) over a target horizon within a given confidence interval.” VaR models and similar statistical methods pretend to estimate the largest possible loss that an investor might experience over a given period of time to a given degree of certainty. The use of VaR type models, including the version imbedded in the Basel II agreement, involves a number of assumptions about risk and outcomes that are speculative. More important, the widespread use of these statistical models for risk management suggest that financial institutions are subject to occasional “Black Swans” in the form of risk events that cannot be anticipated. We take a different view. We don’t actually believe there is such a thing a a “Black Swan.” Our observations tell us that a more likely explanation is that leaders in finance and politics simply made the mistake of, again, believing in what were in fact flawed models and blinded themselves to what should have been plainly calculable innovation risks destined to be unsustainable. Or worse, our leaders in Washington and on Wall Street decided to be short sighted and not care about the inevitable debacle. [less]