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 Talebs concepts of: The Black Swan Narrative fallacy Confirmation bias Rest of the Lecture & Final Week Revision & exam preparation...
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LEC12 - harm than good Revised Readings for Week 12...

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