LEC12 - harm than good Revised Readings for Week 12 •...

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1 ACCG329 Lecture 12, Financial Models: Limits and Failure; Revision 2009 Semester 1, Egon Kalotay High Impact, Low Frequency Events • Black Swan: are high impact, low frequency events that completely undermine the applicability of conventional frameworks for the pricing of derivatives and the management of risk • The Black Swan problem is compounded by: – The Inverse Problem – Psychological biases
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2 The Inverse Problem • What is it? • Implication: Black Swans are by their nature not amenable to empirical (data based) modeling Psychological Biases • Confirmation Bias (more a failing of logic): where empirical evidence or lack thereof is used to confirm a hypothesis or belief • Narrative Fallacy: a need to fit a structure or story to a series of observations • Relevance?
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3 Implications • Far reaching! • Finance: models and associated risk management techniques may do more
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Unformatted text preview: harm than good Revised Readings for Week 12 • Compulsory: – Chapters 5 & 6 from ‘The Black Swan’ on Blackboard shortly – The Risks of Severe, Infrequent Events (The Banker, 2007) – Recipe for Disaster: The Formula That Killed Wall Street (Wired Magazine, 2009) • Optional/Additional – 4th Quadrant article (first half) – N. N. Taleb: the prophet of boom and doom – Glossary of Black Swan related terms (helpful!) 4 Tutorial Question for Week 12 • The Wired Article (Formula that Killed …) provides an analysis of the origins of the financial crisis engulfing credit markets. Explain the main points of the article in terms of Nassim Taleb’s concepts of: – The Black Swan – Narrative fallacy – Confirmation bias Rest of the Lecture & Final Week • Revision & exam preparation …...
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This note was uploaded on 08/13/2011 for the course ACCG 329 taught by Professor Egonkalotay during the Three '09 term at Macquarie.

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LEC12 - harm than good Revised Readings for Week 12 •...

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