Toto, We’re Not in Mediocristan Any More


More on the poor applicability of financial models to the real world from the Economist:

Goldman Sachs admitted as much when it said that its funds had been hit by moves that its models suggested were 25 standard deviations away from normal. In terms of probability (where 1 is a certainty and 0 an impossibility), that translates into a likelihood of 0.000…0006, where there are 138 zeros before the six. That is silly.

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