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February 25, 2009
Single, Simple Numbers: Use At Your Own Risk
I wanted to link to this excellent article by Felix Salmon over at Wired. He's talking about the mathematical formula that convinced many people on Wall Street that they'd figured out how to price out correlated risks in debt securities. As we all now know, they'd done no such thing, even though trillions of dollars ended up riding on the whole idea.
The article's well worth reading just on those terms. But it's also worth thinking about for what it says about other fields where the risks - and the correlations between different risks - can't be well measured. Such as drug discovery and development! Many examples in Salmon's article can be extended directly to our own industry: what are the risks of each compound in Company X's pipeline failing? If a compound with a similar mechanism wipes out over at Company Y, how have the odds now changed? What about patent risks - if a Supreme Court decision makes everyone rethink issues of infringement or obviousness, how correlated are the patent-busting exposure around the industry? And so on. . .
The difference is that we haven't (quite) convinced ourselves over here that we've got it all figured out, and we haven't issued billions of dollars in derivative securities on top of our individual drug development programs. Not yet, anyway. But if you come away from a study of the current situation with a mistrust of any formula that people try to use to quantify complex systems down to one easy-to-use number, well, you've come out ahead.
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