On 10/6/08, Henry Baker <hbaker1@pipeline.com> wrote: [etc etc] The application of correct, or frequently incorrect, statistical methods to unsuitable phenomena, along with the accidental, deliberate or ignorant misinterpretation of the results, is so endemic that I do not suppose anyone on this list is going to disagree with the above message. All the same, a couple of things occured to me while reading it. The remark about globalisation raises an issue which I have never seen explored technically: the network aspects of financial markets. Even as crude a model as a resonant electrical circuit is sufficient to suggest that, left to its own devices, such a network is certain --- under (in)appropriate conditions --- to become unstable. An engineer equipped with a suitable model may able to design the network to avoid this development. In the situation to hand, there is (as far as I am aware) no engineer in charge. Another feature of networks [from percolation theory rather than basic physics] is that they go critical: as traffic approaches the maximum capacity, a small increase traffic precipitates sudden gridlock over a large region. As a result, a crisis arising from other causes is intensified by the inability of the participants to communicate at all. It seems a shame that we cannot make more use of the mathematics and physics we already have! And again: Mr Taleb is credited with making himself 40M$, presumably on the back of short-selling. [I'm not going to criticise him on thos grounds --- if people are permitted to profit by backing stocks to rise, then it makes no sense to forbid them to profit by backing them to fall --- at any rate, provided it's their own money they're risking.] But how should this datum be interpreted? On a personal level, if somebody you know makes a number of correct predictions, you would (very reasonably) begin to trust his judgement. On a larger scale, this strategy is no longer valid: a well-known scam involves spamming a large number of recipients with predictions of some mildly improbable event, then proceeding to swindle the small proportion for whom the random prediction happens to come true. So Mr Taleb has done very well: he's made one fortune by gambling on the market, and will doubtless make another by talking about how he did it. However, whenever people attempt to avoid having to do their own thinking by following some guru who happened to get lucky last time, they only succeed in tumbling into the next elephant trap; and when politicians pursue this strategy, the outcomes is liable to be particularly serious. Keep your guard up folks --- it ain't (never) necessarily so! Fred Lunnon