Risk and rationality, investment and life
Its fairly obvious that people are not, except for a few analytical souls, rational about risk: they worry obsessively about small risks and ignore ones that matter, and they are often no more rational about investing. (more…)
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Financial models and climate models
A few years ago we were assured that complex financial models used by banks could be relied on to correctly assess financial risk. This was supposed to ensure that banks would stay solvent, and the financial system stable. It turned out that insufficient back-testing, subtle pressure on those building the models to produce the “right” results, and the intrinsic problems of complex models, meant that the models were far from good enough.
We are also asked to trust complex models of climate change that predict rising temperatures. I am inclined to distrust complex models in general, but leaving that aside, are these likely to suffer the shortcomings of the bank’s risk models? (more…)
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