Black Swans in the Economist

A recent Economist (vol 384, no. 8542, 18-24 August 2007) had two great pieces of evidence for Nassim Nicholas Taleb’s contentions in The Black Swan that we never predict the really important events, and that Wall Street is dangerously addicted to (Gaussian) models that do not correctly reflect the likelihood of very rare events.

From On top of everything else, not very good at its job, a review of a history of the CIA by Tim Weiner:

“The CIA failed to warn the White House of the first Soviet atom bomb (1949), the Chinese invasion of South Korea (1950), anti-Soviet risings in East Germany (1953) and Hungary (1956), the dispatch of Soviet missiles to Cuba (1962), the Arab-Israeli war of 1967 and Saddam Hussein's invasion of Kuwait in 1990. It overplayed Soviet military capacities in the 1950s, then underplayed them before overplaying them again in the 1970s.”

From The game is up, a survey of how the sub-prime lending crisis came about:

“Goldman Sachs admitted [that their investment models were useless] when it said that its funds had been hit by moves that its models suggested were 25 standard deviations away from normal. In terms of probability (where 1 is a certainty and 0 an impossibility), that translates into a likelihood of 0.000...0006, where there are 138 zeros before the six. That is silly.”