Tito's Blog

A Long Term View

Interesting graphs that compare the current Great Recession with previous post-war recessions and the Great Depression are available at Quarterly Update: The Recession in Historical Context (pdf) by the Council on Foreign Releations.

A Fractal Method For Risk Management

Today I found a Financial Times article authored by Benoit Mandelbrot (yes, the Mandelbrot set guy) and Nassim Taleb (yes, the Black Swan guy) dating back to March 23, 2006.

They introduce a “fractal” approach to describe our world of wild randomness, as opposed to a traditional Gaussian model, to take into account rare but extremely impactful events. For example, fat-tail stable distributions are more suitable to explain returns of financial instruments and business events in general.

The same article is included in one of the introductory chapters of The Black Swan, when Mr. Taleb defines Mediocristan and Extremistan worlds.

While scalable laws do not yet yield precise recipes, they have become an alternative way to view the world, and a methodology where large deviation and stressful events dominate the analysis instead of the other way around. We do not know of a more robust manner for decision-making in an uncertain world.