tag:blogger.com,1999:blog-7366878066073177705.post195545777312574848..comments2024-02-09T18:16:45.614+00:00Comments on The Psy-Fi Blog: When Muddled Modellers Model Muddlestimarrhttp://www.blogger.com/profile/06254802085744425067noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-7366878066073177705.post-5209730758769836362011-02-14T18:26:36.256+00:002011-02-14T18:26:36.256+00:00"To make a model we have to start with an ass..."To make a model we have to start with an assumption..." <br /><br />That is the fatal flaw in soft-science models. It reminds me of the recipe for chicken soup in The Economist's Cookbook: "first assume a chicken."Kent Grealishhttp://www.quacera.comnoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-59425696848933156492011-02-13T03:25:15.585+00:002011-02-13T03:25:15.585+00:00Alpha is merely proof of a flawed risk metric. Th...Alpha is merely proof of a flawed risk metric. There must be some universal conservation law that says risk is never created or destroyed, only rearranged. It should have been a red flag when splitting the credits into pieces netted out a value larger than what went in. I imagine the free money made it hard for anyone involved to doubt the existence of the philosopher's stone.dunkelblaunoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-29324345563876587572011-02-12T22:44:51.015+00:002011-02-12T22:44:51.015+00:00Some good thoughts in here, although I do not thin...Some good thoughts in here, although I do not think models are intrinsically good or bad. Models are a tool to help make reasoned decisions but obviously cannot replace common sense and other forms of judgment. Models can definitely get you in trouble but a back of the napkin approach can do the same. If the point is that we should all be suspect of models, I think that is correct. However, I would argue models can be a useful tool to supplement other analysis. - Adrian MeliAdrian Melinoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-85848213891162242832011-02-09T19:11:28.742+00:002011-02-09T19:11:28.742+00:00I don't usually reply twice, but intelligent c...I don't usually reply twice, but intelligent comments are hard to ignore :)<br /><br />As I wrote last week, although it's clear that UK savers were compromised by moral hazard it's not clear that business managers were: if they had they'd have worked their share options far harder. It looks more like they didn't understand the risks they were taking, or at least they didn't want to understand them. <br /><br />In the end businesses are run by people and it's the people that make the mistakes. I don't think most of these people felt their organisations were too big too fail, I think they felt they were too clever to let them fail.timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-55957301369154977982011-02-09T12:54:54.352+00:002011-02-09T12:54:54.352+00:00And then you have moral hazard. Is there any incen...And then you have moral hazard. Is there any incentive for the businesses to care whether their model is profitable and accurate in the long term, when they can see that it will produce excellent returns for them in the short term and the downside will be shared with the whole of society.<br /><br />(Sorry for posting twice - I normally just read and move on but this one has really piqued my interest)Anonymoushttps://www.blogger.com/profile/07805018914978901860noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-9517618448834619392011-02-09T12:09:27.906+00:002011-02-09T12:09:27.906+00:00I mostly agree with that: I think the real issue i...I mostly agree with that: I think the real issue is that any system that includes humans is intrinsically affected by reflexivity: the system changes the way people behave which changes the system. So the models need to adapt as the responses to them change and it's unlikely that process will ever end.<br /><br />There are also (at least) two problems underlying implementing this adaptability. Firstly there's figuring out what the changes are quickly enough to change the models before something goes badly wrong. Secondly there is often quite strong pressure to avoid changing the models if they'll have a negative impact on business expectations. I covered this in the article on <a href="http://www.psyfitec.com/2010/11/risk-reality-and-richard-feynman.html" rel="nofollow">Risk, Reality and Richard Feynman</a>.<br /><br />The brutal reality is, I think, that if any business comes to rely on models too heavily without understanding their intrinsic limitations then they're more risky than they might seem - and investors should behave accordingly.timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-20685046319658366072011-02-09T11:28:24.911+00:002011-02-09T11:28:24.911+00:00Isn't this exactly a case of "models whic...Isn't this exactly a case of "<i>models which are correct but provide an incorrect solution due to specification errors</i>". The models adequately described the risks of the market before the model was used and increased lending.<br /><br />What was needed was a new model based on what was likely to happen to lending (and defaulting) if the first model was applied - and then a new model and another in some kind of recurrance relationship. Hopefully the repeated models might stabilise around a new usable meta-model. If they don't then the models are not fit for purpose.Anonymoushttps://www.blogger.com/profile/07805018914978901860noreply@blogger.com