25 Standard Deviations??

Bell Curve

From an Aug 13 Financial Times story on the losses at Goldman Sachs:

“We were seeing things that were 25-standard deviation moves, several days in a row,” said David Viniar, Goldman’s chief financial officer. “There have been issues in some of the other quantitative spaces. But nothing like what we saw last week.”

Now either the virtually impossible is happening on a regular basis, or the bell-curve models these guys are using are way off. I vote the latter. I think Taleb would agree.

via Brad deLong.

Update:  deLong subsequently posted a few other things on this topic, suggesting that it’s not a bell curve model – but the same principle still applies – it seems that too many folks in the business do not fully understand their risks.

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