The Black Swan


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The Gulf oil disaster brings into question the vaunted risk management that big companies use to justify practices that can have catastrophic consequences.  Every one of the parties involved including the US Government has done risk management studies and must have concluded that things were 'riskable'.

A friend of mine illustrated this by tossing a deck of cards on the table and asking me to predict the probability of exactly the mess spread out before us "Guess what?" he said after I gave him a rough answer that a the probability of an order of 52 cards was about 8  1067.  He said  "It happened didn't it"?

The Black Swan Theory is used by Nassim Nicholas Taleb in his book to explain the existence and occurrence of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations. 

We were not prepared for the oil disaster and everyone needs to take a good strong look at drilling for oil a mile down.  The sites that rest on the sea bottom are quite another story.  They are far easier to install, control and maintain.

It is said that there are more than 40,000 wells in the Gulf of Mexico resulting in 25% of the US domestic oil.  This will amount to the largest environmental disaster of all time. 

One good bet is that the Oil Industry will not regulate itself!

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Tuesday, May 11, 2010