LOL

I think Taleb concurs...

Statistical and applied probabilistic knowledge is the core of knowledge; statistics is what tells you if something is true, false, or merely anecdotal; it is the "logic of science"; it is the instrument of risk-taking; it is the applied tools of epistemology; you can't be a modern intellectual and not think probabilistically--but... let's not be suckers. The problem is much more complicated than it seems to the casual, mechanistic user who picked it up in graduate school. Statistics can fool you. In fact it is fooling your government right now. It can even bankrupt the system (let's face it: use of probabilistic methods for the estimation of risks did just blow up the banking system).

Anyway, the Physics PhDs may have been "crucial in developing extremely complex securitization and other fancy financial tools" but they didn't decide to use them nor did they decide on the amount of collateral institutions needed to hold underlying their derivative portfolios.

What is really annoying here is the search for a single culprit - systemic crises have many causes. One of the causes is accounting standards set by the accountants themselves, which allow things like

Footnotes [to financial statements] also contain disclosures relating to contingent losses. Firms are required to accrue a loss (recognize a balance sheet liability) when both of the following conditions are met:

• It is probable that assets have been impaired or a liability has been incurred.
  
• The amount of the loss can be reasonably estimated.
  

If the loss amount lies within a range, the most likely amount should be accrued. When no amount in the range is a better estimate, the firm may report the minimum amount in the range.
SFAS (Statement of Financial Accounting Standards) 5 defines probable events are those "more likely than not" to occur, suggesting that a probability of more than 50% requires recognition of a loss. However, in practice, firms generally report contingencies as losses only when the probability of loss is significantly higher.
Footnote disclosure of (unrecognized) loss contingencies is required when it is reasonably possible (more than remote but less than probable) that a loss has been incurred or when it is probable that a loss has occurred but the amount cannot be reasonably estimated. The standard provides an extensive discussion of loss contingencies.

Let's see, accountants have agreed that it's good practice to

1. not recognise a loss at all if you can't estimate its amount
   
2. if you can give a range of estimates, give the lowest of the range
   
3. not even put a footnote unless it is more likely than not that a loss has been incurred.
   

Any actuaries in the room? Is this sensible or is it an abuse of probability, too?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith