Ceteris Paribus

If risk models failed on Wall St., what does that say about climate change models?

From MachineDesign.com, By Engineers For Engineers:

“In risk modeling, you use a lot of statistics because you want to learn from the past,” says Groenendaal.* “That’s good if the past is like the future, but in that sense you could be getting a false sense of security.”

That sense of security plays directly into what happened with banks and financial instruments based on mortgages. “It gets back to the use of historical data,” says Groenendaal. “One critical assumption people had to make was that the past could predict the future. I believe in the case of mortgage products, there was too much faith in the idea that past trends would hold.”

Therein lies a lesson. “In our experience, people have excessive confidence in their historical data. That problem isn’t unique to the financial area,” says Groenendaal. “You must be cynical and open to the idea that this time, the world could change. When we work with people on models, we warn them that models are just tools. You have to think about the assumptions you make. Models can help you make better decisions, but you must remain skeptical.”

Did the quantitative analysts who came up with ineffective financial models lose their jobs in the aftermath? Groenendaal just laughs at this idea. “I have a feeling they will do fine. If you are a bank and you fire your whole risk-analysis department, I don’t think that would be viewed positively,” he says.

Interestingly enough, Groenendaal suggests skepticism is also in order for an equally controversial area of modeling: climate change.

“Climate change is similar to financial markets in that you can’t run experiments with it as you might when you are formulating theories in physics. That means your skepticism should go up,” he says.

We might add there is one other similarity he didn’t mention: It is doubtful anyone was ever fired for screwing up a climate model.

--Leland Teschler, Editor

* Huybert Groenendaal is a partner and senior risk analyst with Vose Consulting LLC in Boulder, Co., a firm that works with banks and other companies trying to mitigate risks. His Ph.D. is in modeling the spread of diseases.

I blame global warming...

The BBC reports:

Heavy snow has fallen across large parts of the UK, disrupting travel and closing thousands of schools.

South-east England has the worst snow it has seen for 18 years, causing all London buses to be pulled from service and the closure of Heathrow's runways.

The Met Office has issued an extreme weather warning for England, Wales and parts of eastern Scotland.

By late Monday, the South East could be under a foot (30cm) of snow and the North East under 20 inches (50cm).

Speaking at a press conference in Downing Street, Prime Minister Gordon Brown said: "We are doing everything in our power to ensure services, road, rail and airports are open as quickly as possible, and we are continuing to monitor this throughout the day."

'Dangerous driving'

BBC weather forecaster Tomasz Schafernaker said the worst-affected area has been the Thames Valley and Greater London where the transport network is at its most concentrated, which is why there has been such chaos.

He said some parts of London have seen up to 8 inches (20 cm) of snow and through Monday evening there will be another band of snow.

Overall, some parts of London could see a foot (30cm) of snow, while northern England and the Pennines could see as much as 20 inches (50cm) - made worse by strong winds which will cause snow to drift, he added.

Global warming, climate change, same difference, right?

H/T: Billy