Probability theory and the Great Recession

I just watched a lecture from one of the Open Yale Courses on Financial Markets.

There’s a lot of things not to like about it. Among others:

– the lecturer is ill;

– the lecturer seems lost a couple of times;

– if you have some background in statistics, a sizeable portion of the lecture is a snooze.

– the lecture uses Apple to illustrate two of his main points. It’s too obvious a choice and I would have liked something more adventurous.

Nevertheless, I still really enjoyed it. His passion for the subject shines through in his explanation of basic statistics and in his numerous anecdotes. For someone like me, who has never studied finance, it’s a fun and brief introduction to the subject.

The lecturer argues that the story of the most recent financial crisis is described in the form of a historical narrative, even when told by some economists. What is missing from the narrative is the role of probability theory underlying events in the stock market. He focuses on the failures of assumptions used to calculate the VaR (Value at Risk), most importantly the independence assumption and the normal distribution of random events.

Probability theory and the Great Recession

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