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You can quantify in normal domains e.g. probability of seeing a human over 2.05m tall. You CAN'T quantify tail risk in unbounded (for practical purposes) domain
by juskrey 7y ago
You can quantify in normal domains e.g. probability of seeing a human over 2.05m tall.
You CAN'T quantify tail risk in unbounded (for practical purposes) domains, period.
This is just ridiculous: "For this example, there’s about a 2% chance losses would exceed $60 million in a year."
If you see you can lose everything, you are not quantifying, you are simply not going that way. If you don't know if you can protect yourself from losing everything, you are not going that way. If you can afford losing some limited amount you just write down the loss from the very start. That is that simple.
Netflix is just going straight to hell with such prediction approaches. And, mind that, this is not a prediction, this is a fragility statement.
- bernardv 7y agoOh yes you can. The insurance and reinsurance actuaries, and regulators, have done this for a very long time.
- juskrey 7y agoInsurance and reinsurance just clip the tail contractually, they never take "infinity multiplied by some small percent" risk! They don't go underground when their client does.
- Chris2048 7y ago> they never take "infinity multiplied by some small percent" risk At what point does the tail represent "all humanity dead"? No one needs a contract for the humanly unrecoverable.
- juskrey 7y agoWe are talking about business death
- Chris2048 7y agothen the tail ends even before then, but that doesn't mean insurance companies don't pay out billions in case of an economic crash.
- juskrey 7y agoSorry, I barely understand, what insurance against economic crashes?
- Chris2048 7y agoI didn't mention "insurance against economic crashes" - there is a crash, and this has the effect of lots of payouts. Some event may cause an economic crash, companies can have insurance against business disruption. If an event suddenly causes a lot of insured business disruption, that might mean a large total payout.
- harperlee 7y agoThey are typically exempt in case of natural disasters, war, force majeur, nuclear effects, and a well-thought-out plethora of tail risk events.