Shorter, clearer, with no swan in the pond

In the current issue of Significance, there is a four page discussion by Bill Janeway on the current financial crisis and the role of statistical models. If you remove the pictures and the quotes from Alice, it is more like three pages and they tell you much more than the three-hundred-somes of The Black Swan. For instance, the paper relates to references that appeared much earlier than the book to point out the distinction between uncertainty and randomness, a point on which The Black Swan is always vague, it also spells out that there are not always true models and that time-series are not always stationary, two points that The Black Swan misses, and that ergodicity does not apply and that markets are not rational. As in The Black Swan, there are mentions there of black swans as events that “happen once in five hundred years”, too, as well as of the inadequacy of models like Value at Risk (which provides a quantile estimate on the risk but no loss evaluation) and of Gaussian assumptions, but the paper also blames the crisis on the abandonment of the essential balance-sheet by banks. In its conclusion about the rise of behavioural finance, Janeway relates to Taleb by quoting from his hero, John Maynard Keynes, but for reasons different from Fooled by Randomness. Ending on “bad models are bad” by calling for models that explore inefficiencies in the markets is not going to solve the crisis, but, again, the paper gives a much clearer and more informative message than The Black Swan did.

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