Author Topic: Beware Models - Or How To Deal With Tail Risks  (Read 1506 times)

innerscorecard

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Beware Models - Or How To Deal With Tail Risks
« on: July 21, 2015, 01:09:23 AM »
http://arxiv.org/ftp/arxiv/papers/1103/1103.5672.pdf

Quote
One of the more memorable moments of last summer’s credit crunch came when the CFO of Goldman Sachs, David Viniar, announced in August that Goldman’s flagship GEO hedge fund had lost 27% of its value since the start of the year. As Mr. Viniar explained, “We were seeing things that were 25-standard deviation moves, several days in a row.”

One commentator wryly noted: That Viniar. What a comic. According to Goldman’s mathematical models, August, Year of Our Lord 2007, was a very special month. Things were happening that were only supposed to happen once in every 100,000 years. Either that … or Goldman’s models were wrong (Bonner, 2007b).

The moral, to my mind, is to be resilient, and not count on things happening in the future as they have in the past. Have a plan B. Because weird things might happen. But then, as MMM says, don't worry too much about the weird things happening, as that itself causes disutility. In MMM's case, he could do construction work or go back to programming, and his wife could do real estate or finance work. Jacob from ERE can live off basically nothing, and also has a variety of life skills, from woodworking to derivatives trading.

So I think the lesson is, somewhat paradoxically, to worry LESS about eliminating all risk. As it cannot be totally eliminated. Instead, having a back-up plan, then live life.
« Last Edit: July 21, 2015, 01:14:11 AM by innerscorecard »

wombat

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Re: Beware Models - Or How To Deal With Tail Risks
« Reply #1 on: July 22, 2015, 04:23:07 PM »
Hindsight bias is an issue. People look back on charts and see these jagged lines but think, in the future, they will be smooth 8% returns. Few battle plans survive the first engagement! Be prepared to adapt and respond to changing conditions.


forummm

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Re: Beware Models - Or How To Deal With Tail Risks
« Reply #2 on: July 22, 2015, 05:03:52 PM »
I thought this thread was going to be about avoiding the dangers of women with attractive backsides.

GuitarStv

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Re: Beware Models - Or How To Deal With Tail Risks
« Reply #3 on: July 22, 2015, 05:10:43 PM »
I thought this thread was going to be about avoiding the dangers of women with attractive backsides.

As did I . . .

innerscorecard

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Re: Beware Models - Or How To Deal With Tail Risks
« Reply #4 on: July 22, 2015, 05:32:56 PM »
I thought this thread was going to be about avoiding the dangers of women with attractive backsides.

LOL. Some dangers are worth incurring!