Quants partly responsible for the crisis?

[IlyaKEightSix]

That part I understand.

That said, why can't these ridiculously improbable but potentially annihilating events be hedged away if they're so underpriced?

 

[bigbadwolf]

That part I understand.

That said, why can't these ridiculously improbable but potentially annihilating events be hedged away if they're so underpriced?

Do you? Because of mispricing of Black Swan events, someone ends up making heavy losses. More importantly, such events are difficult to incorporate in models because 1) they may never have occurred, so modelers may not even know they could happen, 2) they may have occurred only once or twice in history, and there's no way of estimating how and when they will occur again, and 3) quants have no idea of the causal mechanisms involved in economic and financial events (in fact, no-one does) and the tools quants use -- time series, estimation of variance, etc. -- are just (smoothed) extrapolations from the (mostly recent) past, with no insight into what are causes and what are effects.

At a more fundamental level, people like Taleb and Buffett are arguing there's a fundamental mismatch between mathematics and statistics on the one hand and finance and economics on the other. Something quant schools will hurriedly brush under the rug.

 

[Dave Haan]

Taleb even annoys annoying political economists.