"Remember," a good friend of mine who is an investment adviser said the other day, "that economics is a behavioral science." This observation was born out the very next day by all the blogging activity triggered by Princeton economist’s Uwe Reinhardt’s New York Times blog, "Can Economists Be Trusted?" Many of the points made in […]

# Daily Archives: January 26, 2009

## Who Mentioned Black Swans? Difficulties in estimating the probability of low probability events

The recent credit crisis has brought into focus some of the difficulties in estimating and calibrating risk analysis models in which events of low probability are used. For example, suppose a AAA-rated security is deemed to have a 1% chance of default in a particular year. How good is that 1% estimate? More generally, suppose […]