There is a theory brewing that the ignorant wielding of statistics-based risk management is deep at the heart of the current financial panic. Nassim Nicholas Taleb is quite outspoken in this matter. He goes on at length about the inadequacies of statistical methods for financial risk management.

NY Times writer Joe Nocera [link may require free subscription] echoes this sentiment- but in greater breadth- in a recent article in the NYT. Nocera focuses on Value at Risk- VaR.  Since my statistics training is limited, the reader will have to draw their own conclusions on the merits of this methodology.

Taleb warned about “Black Swans” a while back in a book by that title.  A man not overly burdened with modesty, Taleb has transcended to the status of an Illuminati due to his prescience on the blindness of statistics-based financial risk management in predicting low frequency catastrophic events, or Black Swans.

Perhaps the old cartographic flourish “There Be Dragons!” should be updated to “There Be Black Swans!”

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