Problems With Probability
PROBLEMS WITH PROBABILITY
“Quants” assigned a dollar figure representing how much the firm could lose each day with 99% probability
PROBABILITIES BASED ON PREVIOUS PERFORMANCE
There is no known probability distribution of a systemic crisis or wide-spread emergency. Almost by definition, these things are too rare.
THE QUANTS’ ERRORS
- Precision is not accuracy
- Estimates of underlying probabilities were wrong
- Neglected “tail risk”
Remember the metaphor of statistics as a gun? Can be incredibly useful in the right hands, but very dangerous in the wrong ones.
THE MOST COMMON PROB PROBS
ASSUMING EVENTS ARE INDEPENDENT
SIDS OR “COT DEATH” IN UK, 1990S
THE SPORTS ILLUSTRATED JINX
This does not contradict the gambler’s fallacy.
BUSINESSWEEK’S “BEST MANAGERS”
EUROPEAN COMMISSION POLICY: GENDER
PREDICTIVE ANALYTICS = PROFILING
How we use statistics have social implications. What we can and should do with this information is an ethical and legal question. We aren’t always ready for that.
JUST BECAUSE YOUR CALCULATION IS RIGHT,