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Big Finance's hyper-focus on frequency creates a blindspot on magnitude


Big Finance's hyper-focus on frequency creates a blindspot on magnitude - The Week\

My main takeaway from Alan Greenspan's latest book, The Map and the Territory: Risk, Human Nature, and the Future of Forecasting: Forecasters (and all those who rely on them) fail to realize that over the long run, even frequently accurate predictions mean little without taking into account the magnitude of relatively infrequent mistakes.

"In practice," Greenspan writes, "model builders (myself included) keep altering the set of chosen variables and equations specifications until we get a result that appears to replicate the historical record in an economically credible manner."

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Well said.

Sometimes we get so caught up on the expected case that we fail to see the worst case.

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