September 17, 2008
And on the 1001st Day...
Because everyone could use a dose of statistics every now and again, I present an excerpt from Nassim Nicholas Taleb's Edge article, THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS:
The Dangers Of Bogus MathI start with my old crusade against "quants" (people like me who do mathematical work in finance), economists, and bank risk managers, my prime perpetrators of iatrogenic risks (the healer killing the patient). Why iatrogenic risks? Because, not only have economists been unable to prove that their models work, but no one managed to prove that the use of a model that does not work is neutral, that it does not increase blind risk taking, hence the accumulation of hidden risks.
Figure 1 My classical metaphor: A Turkey is fed for a 1000 days—every day 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.
Figure 2 The graph above shows the fate of close to 1000 financial institutions (includes busts such as FNMA, Bear Stearns, Northern Rock, Lehman Brothers, etc.). The banking system (betting AGAINST rare events) just lost > 1 Trillion dollars (so far) on a single error, more than was ever earned in the history of banking. Yet bankers kept their previous bonuses and it looks like citizens have to foot the bills. And one Professor Ben Bernanke pronounced right before the blowup that we live in an era of stability and "great moderation" (he is now piloting a plane and we all are passengers on it).
The full article is a good read--even if you are not particularly concerned with our current economic situation. Also available is a technical appendix here. Two other interesting research questions related to iatrogenic risk involve whether or not screening and prevention programs contribute to, rather than help prevent, their targeted problems (e.g., here related to suicide ideation and here related to substance abuse); and the potential for a previously non-distressed individual family member to become distressed during the course of family therapy (e.g., here). A (fairly technical) Wikipedia entry on Poisson distributions can be found here.
Posted by perry032 at September 17, 2008 7:32 AM| Printer-friendly version