From the 1980s on, some of these techniques came into usage by modern investment banks and hedge funds. They also adopted a notion we rejected, called VaR or “value at risk,” where they estimated the damage to their portfolio for, say, the worst events among the most likely 95 percent of future outcomes, neglecting the extreme 5 percent “tails,” then acted to reduce any unacceptably large risks. The defect of VaR alone is that it doesn’t fully account for the worst 5 percent of expected cases. But these extreme events are where ruin is to be found. It’s also true that extreme changes in
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