15 August 2011

Randomness: Why It Matters and What to Do About It

Risk is different from uncertainty. Conflation errors result from treating both as though they were the same by using the metrics of one-size-fits-all governance. This gives rise to the flawed financial effort that attempted to sell noncorrelated investments through the same distribution channel as Citigroup’s financial supermarket tried to do; and, the flawed financial effort that attempted to hedge positive and negative cash flow tranches of mortgage-backed securities as financial engineers tried to do. Accordingly, we advocate an interdisciplinary approach for segmenting one-size-fits-all deterministic metrics into predictable, risky, and uncertain governance regimes to better correlate the underlying economic domain’s randomness.

Download: