12.16.07
Risk models
People working on biocomplexity and resillience science are factoring in a method for including unlikely but extreme events (fat tails) in cost-benefit analyses, such as the uncertainty surrounding climate sensitivity. They are approaching it from a hard science perspective, and are getting it right, imho. By contrast, conventional financial risk models are under attack from a variety of sources, from Teleb’s Black Swan theory which began as more anecdotal than mathematical to the neglected but increasingly relevant idea by Benoit Mandelbrot that our fundamental risk model, using the bell curve, should be reconfigured as a power law, the kind of network pattern we see in everything from epidemic outbreaks to the growth of dominant sites on the internet. It’s good to see that Teleb and Mandelbrot are writing together. Social stock exchanges will need a new model of risk, since there are new, social values on the balance sheet for these companies.
