Financial Crisis: Calculating the Probability of Extreme Events

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ScienceDaily (Sep. 26, 2011) — It had to happen: the property bubble burst and the global financial market experienced its biggest crisis in the last hundred years. In retrospect, many suspected it was coming, but nobody could have known for sure. The traditional investment strategy failed, as all forms of investment suddenly collapsed at the same time. In order to calculate the probability of several such extreme events occurring at the same time, three scientists at the RUB have developed a new method. Prof. Dr. Holger Dette, Dr. Axel Bücher und Dr. Stanislav Volgushev from the Institute of Statistics (Faculty of Mathematics at the Ruhr-Universität) published their findings in the scientific journal The Annals of Statistics. 

Big things start small

Up to now, when statisticians estimated the probabilities of extreme events, they usually calculated with dependencies between the outliers of statistical series. The outliers, however, make up the smallest part of a data set, e.g. the largest 100 out of 3,600 data. That means they ignore the dependencies of the bulk of the relevant data set, namely 3,500 data, and thus take the risk that important information is lost. Axel Bücher shows how this problem can be solved: "Our work provides a decision aid as to whether it is better to use the full range of data and not only the outliers. If all the data are relevant, then they should all be included. However, this is not always the case. Sometimes these data would falsify the result."



Multidimensional function

The researchers use the copula function for the evaluation. "This is a complicated, multi-dimensional function, which characterises stochastic dependencies between the data" explains Stanislav Volgushev. With this aid, a few years ago we might have noticed that many little termites were nibbling their way into the wooden foundation of the global financial market, whilst we were on the look out for large predators.

Financial crises as motivation for research

"Our research is strongly motivated by the recent financial crises. At that time, almost all the economic models and forecasting tools for loan losses failed because they did not pay sufficient attention to extreme dependencies. In the long run, we aim to develop models and methods that predict such events better" says Prof. Dette, explaining the reason for their research. For several years, the three researchers have been looking into new methods of asymptotic statistics which work with sample sizes approaching infinity. They are financed by the German Research Foundation (DFG) in the Collaborative Research Centre SFB 823 "Statistical modelling of nonlinear dynamic processes." The English-language publication bears the title "New estimators of the Pickands dependence function and a test for extreme-value dependence."

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How To Kick Innovation Up a Notch to Nanovation?

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Martin Zwilling, Contributor;

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What sparks paradigm-shifting innovation in any business? It’s a special mix of entrepreneur and company, regular in every respect except for having the courage and foresight to make an idea happen that was supposed to be impossible. As an entrepreneur in a startup, how do you know if you have this potential, and what are the steps to get from an innovation to a revolution?

The first step is to meditate on the examples set by others, like Steve Jobs of Apple, Jeff Bezos of Amazon, or Thomas Edison with the electric light. There are many others, like the one I just finished about Ratan Tata bringing out the Nano car in 2009 in India for less than $2,500. The book is called “Nanovation,” by Kevin & Jackie Freiberg.



These authors have studied many such examples, and summarize my own perspective on the characteristics of entrepreneurs they call “nanovators,” that produce true, life-changing innovations, which they call nanovations:

1. Get wired for nanovation. We all agree that innovation is an adventure into the unknown. If you want people to follow, you need to be able to convince them of three things: (1) your mission is worth supporting, (2) you have the competence to build a critical mass, and (3) you have integrity to look out for their best interests along the way.
2. Lead the revolution. Nanovators have more than the vision; they have the drive to lead, and the focus to stay on target. They are wired to win. Organizations don’t produce game-changing innovations; people do. They allow a leap of faith in their own ideas, as well as in the ideas and capabilities of their team.
3. Build a culture of innovation. You need a culture where restlessness is tolerated, curiosity is encouraged, passion is inspired, creativity is expected, and people are always talking about what’s next. Ultimately, the mind-set changes so significantly that innovation is natural, and no one is conscious of it.
4. Question the unquestionable. Outsiders ask a lot of questions because they don’t presume to know why something is done a certain way. Make your insiders think like outsiders. Provocative questions like “What if?”, “Why not?”, or “So what?” can help to get everyone outside the box.
5. Look beyond customer imagination. First-of-a-kind products empower customers to do things they didn’t even know they wanted to do, and now can’t live without them. The computer mouse, Tivo, and Teflon are examples. Listen to customers, but remember that they can’t always tell you what they don’t know.
6. Go to the intersection of trends. Nanovators pay close attention to the early warning signs that precede major cultural, societal, and market shifts. Where most people see an isolated trend, nanovators connect the dots by relating one trend to several others. They focus on next practices, versus best practices.
7. Solve a problem that matters. The key here is to resist the temptation to pay more attention to the technology solution than the problem. Some people create brilliant solutions to non-existent problems, like maybe Segway and satellite phones. These solutions may be nice to have, but won’t ignite a revolution to get there.
8. Risk more, fail faster, and bounce back stronger. When you pursue a creative idea that takes you beyond, fear tempts you to make compromises. If you can push through this fear and doubt, or bounce back intelligently from initial setbacks, you often arrive at something that has truly never been seen before.

Jeffrey Immelt of General Electric argues that the next big thing, like the Nano, could well be from “reverse innovation,” where instead of industrialized nations adapting their products for emerging markets, innovation in emerging markets will bring new paradigms to home markets. In any case, the future is defined by what we put off until tomorrow, so don’t wait too long to get started.

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Customer Service with a Snarl !

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Service with a snarl

But Then Again By Mary Schneider

Gone are the days when you can expect politeness and pleasant smiles from your friendly customer service troops.

WHAT’S happening to customer service these days? I feel as if I’m constantly battling with technical support staff and frontline personnel who are becoming more and more rude and inept at their jobs.

Take the other day, for example, when I woke up to find that my car battery was as dead as Paris Hilton’s singing career, forcing me to seek out my nearest car repair shop to get it charged.

As I entered the premises, I was met by a manageress who looked as if she had a lemon stuck to the roof of her mouth. Rather than welcoming my business, she was surly and brusque to the point of rudeness.

Four hours later, when I called to find out how the battery charging was progressing, the Dragon Lady told me, somewhat haughtily, that I had to be patient. Later still, when I called again for another update, she breathed fire down the line and gave me the impression that I was harassing her.

The following morning, a baby-faced mechanic showed up at my house with my super-charged battery, a few tools and a packet of cigarettes.

“Surely, re-installing my battery won’t take so long that you need to have a cigarette break,” I wanted to say, but didn’t.

As he fiddled with the battery, I glanced at the packet of cigarettes lying on my doorstep. The front of the packet had a picture of what looked like a premature baby with an oxygen mask strapped to its tiny face.

“Look what cigarettes can do to unborn babies!” I wanted to say to the young man working beneath my bonnet, but didn’t.

You’d think that someone so youthful and agile would be able to install that battery before you could finish saying: “Did you know that Paris Hilton once cut a record?” But this chap redefined the word “slow”.



I watched impatiently as he attempted to connect the cables to the battery terminals using a spanner that was too big to get the job done – for a full 10 minutes.

Then he turned to me and said: “Do you have a size 10 spanner? I forgot mine.”

Like who did he think I was? The Fix-it Queen? His question would be tantamount to a cardiologist asking his patient if she happened to have a bypass machine in her overnight bag, just before administering the anaesthetic for her heart transplant surgery.

Nonetheless, I did have such a spanner conveniently stashed in a drawer by the front door – where I’d left it after removing the battery the day before. I produced it with a flourish, expecting Babyface to be surprised. But he took it from me as if it were the most normal thing in the world.

After connecting the cables, he spent a gazillion years trying to clamp the battery into place. As I watched him, entire species of animals became extinct, thousands of babies were born (some of them looking like the picture on the cigarette box), continental plates grunted and groaned, and stock markets around the world plunged ever deeper into crisis.

When his slothfulness became unbearable to watch, I withdrew into the living room and began writing a list of things that I needed to do as soon as I was mobile again.

No sooner had I written the first item (get recommendations for a new service centre) when Babyface poked his head around the door and asked for my car key.

Now, my car has two keys. One for the alarm system, and the other for the ignition. How was I to know that he wouldn’t know his arse from his elbow and would attempt to start the car with the wrong key, causing the alarm to go into “let’s disturb the entire neighbourhood” mode.

At this stage I was so agitated, that I took the key from his nicotine stained hand and said, in a somewhat irritated tone: “What have you done?”

He responded by uttering the four words that are guaranteed to make me more agitated: “Now please calm down!”

Ten minutes later, as he was slipping the premature baby into his back pocket, he turned to me and said: “My boss sent me here because I am the only one who can speak English. I usually work with Japanese cars, which are very complicated. Malaysian cars like your Proton Waja are very simple, but I don’t know how to repair them.”

I didn’t know whether to laugh, cry or feel sorry for him.

But I do know where not to go if I have a flat battery in the future.

Check out Mary on Facebook at www.facebook.com/mary.schneider.writer. Reader response can be directed to star2@thestar.com.my.