Stephen Karlson (shkarlson) wrote in 50bookchallenge,
Stephen Karlson
shkarlson
50bookchallenge

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WHEN THE LIMIT IN THE CENTRAL LIMIT THEOREM IS REALLY INFINITY.

Many of the hotshots of high finance enjoyed playing high-stakes poker, bridge, and other games of chance, and the quants among them worked out strategies for beating the casino that worked precisely because there's an upper bound on the number of cards the house deals, and an event out at seven standard deviations from the mean is so unlikely as to be effectively impossible. But when those gambling strategies become the basis of investment strategies, it is the nature of complex adaptive systems that events beyond the second standard deviation occur, sometimes much more frequently than any gambling-based model can handle. If you have a run of events several standard deviations above the mean, and you've played your financial cards right, you're rich, but if those events start coming in below the mean, down comes your house of cards.

And thus William D. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, Book Review No. 42. The focus is on Bear Stearns, a company full of aggressive personalities who became so dizzy with their own success that they held extremely dangerous positions, antagonized many customers, and whose troubles in March 2008 were the first warning of the great financial crash to come.

(Cross-posted to Cold Spring Shops.)
Tags: business, current events, economics, history
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