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The mus and sigmas in this paper on risk modelling would not make Nicholas Taleb very happy



I think he would be more offended on the general idea of risk model. His conclusion: we can't do it. Don't model risk. Set yourself up to benefit from our inability to do it.


If you are a large bank, I don't think that the regulator will take kindly to the statement that you don't model your risk since Taleb says it's not possible. Perhaps a more moderate position would be not to put too much faith in models. Or as Derman writes: "Models are only models, toy-like descriptions of idealised worlds... If you listen to the models’ siren song for too long, you may end up on the rocks or in the whirlpool."




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