Taleb on VaR

Nassim Nicholas Taleb gave a presentation yesterday to the House Subcommittee on Investigations & Oversight on The Risks of Financial Modeling: VaR and the Economic Meltdown.

His presentation is good, and well worth reading in its entirety.

If you’re too busy to read it, Taleb’s Figure 1 gives a good executive summary:

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  • Taleb: Data shows that banks routinely lose everything earned in their past history in single blowups — this happened in 1982, 1991, and, of course now. Every time society bails them out — while bank risk-takers retain their past bonuses and start the game afresh. This is an aberrant case of capitalism for the profits and socialism for the losses.Except it is no longer an aberrant case, but systemic and usual. It is aberrant capitalism, capitalism not as an engine for wealth creation but as a transfer mechanism. Power helps itself to more wealth, and wealth helps itself to more power.

  • Very astute comment!