Friday, September 19, 2008

Taleb on Risk (in less than 1,000 characters)

From the department of unintended consequences...Yahoo's recent launch of del.icio.us 2.0 expanded the notes field for bookmarks to 1,000 characters. As a result, my del.icio.us feed now includes a fair number of mini-essays. Here's the latest, summarizing Taleb's latest essay on risk and today's credit crunch:

"Great essay by Taleb on the current crisis, and the limits of statistics in general. My two favorite paragraphs:

"It appears that financial institutions earn money on transactions (say fees on your mother-in-law's checking account) and lose everything taking risks they don't understand."

"A Turkey is fed for a 1000 days—every days confirms to its statistical department that the human race cares about its welfare "with increased statistical significance". On the 1001st day, the turkey has a surprise."

Taleb argues there are two axes: Decisions can be simple or complex; Distributions can be thin- ("Mediocristan") or thick-tailed ("Extremistan"). Statistics fail when trying to make complex decisions in a thick-tailed domain...errors will occur, and the consequences are catastrophic."

If you're interested in seeing what I'm thinking in raw form, I recommend checking out my linkstream:

http://delicious.com/chrisyeh

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