Monday, January 26, 2009

VaR Reloaded: Hear it “From the Horses' Mouths”

No Mathematical Construct Is So Useful That It Can’t Be Misused by Greedy Bankers

Four blogs ago I introduced you to an essay by New York Times financial columnist, Joe Nocera, who told the tale of the Value at Risk (VaR) calculations that have been developed by physicists and mathematicians to model the risks facing equity traders and bank managers. Just six paragraphs into his highly informative article, Nocera writes: “Nassim Nicholas Taleb, the best-selling author of ‘The Black Swan,’ has crusaded against VaR for more than a decade. He calls it, flatly, ‘a fraud.’” (In fact, The Black Swan was the #1 Highest Selling Nonfiction book on Amazon published in all of 2007.)

In this 10-minute film you can listen to an interview with both Taleb and mathematician Benoit Mandelbrot, the father of fractal fractal geometry. Although coming at the problem from different directions, both are in agreement that what is yet to happen to the economy before it gets better is both unknown and unknowable, but surely includes possibilities far worse than any historical antecedent...

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