Monday, July 27, 2009

Natural disasters and economic "earthquakes"

Some of our recent research is throwing up striking parallels between natural disasters like forest fires, earthquakes etc and "manmade"crisis like the economic crisis, bankruptcies of large corporates, variance of industrial output for large countries etc. These are all falling into a "power curve" something that statisticians and mathematicians have been using a lot in studying complex systems.
One symptom of such a system’s behavior is that the frequency and magnitude of outcomes can be described by a mathematical relationship called a “power law,” characterized by a short “head” of frequently occurring small events, dropping off to a long “tail” of increasingly rare but much larger ones. The latter was dealt in lucid details by folks like Nicholas Taleb in his much famous Blackswan books.
For most of us who have looked at / studied bell curves and always intuitively think of a spread as bell curve, this is quite fascinating. Quite simply, the implications is that extremely large outcomes (Call them black swans if you are a Taleb fan like me!) are more likely than in a normal bell curve.
One self serving thought I had the curve charecteristics were that for PG courses like in IIMs we should use power curve rather than bell curve for relative grading ! Even one of those IIT M quant jockeys can srew-up the grading for the rest of us in a quant paper if using a bell curve rather than a power curve for RGing ;) Hehehe. Sometimes I think Ive still not grown out of the ultra competitive kid ;)

1 comment:

Anonymous said...

Can't you write about something interesting?