Econometricians are also sensitive

One of my favorite podcasts is EconTalk.While last weeks edition featured Ed Leamer from UCLA. Most of the podcast was a discussion about Macroeconomics within thescope of Ed's latest book, the host (Russ Roberts) gave Ed an opportunity to discuss econometrics. Ed made a point that any econometric study should include a sensitivity analysis to see verify if the study is robust. If the study is too sensitive then the study should be considered but not seen as absolute.

This compliments an earlier post on sensitivity analysis for Linear Programming. The lesson I am learning is that while each technique of data modeling can guide organizations to the best answer, it is also important to understand under what conditions does the result remain valid. Without understanding the sensitivity of the model and its results, the effort to make a better decision with scientific skills, could be wasted given the skills may not be applied within the proper conditions. Model building for decisions is not complete until a sensitivity analysis and applying it's results has been performed.

Listen to the EconTalk podcast

Hmmm, here's to wishing AIG had Wargammers

I listen to a number of Podcasts. TED Talks, EconTalk, Stuff you missed in History Class, FLOSS Weekly, etc. There is one podcast that overall has not been very interesting since it seems like each episode is mainly a book review. But of it's collection of book reviews, there was one that stood out from the rest. The podcast is named "The Invisible Hand". The specifc podcast that caught my interest was the book, Wargaming for Leaders: Strategic Decision Making from the Battlefield to the Boardroom. While this podcast was generally interesting since it described how the consulting firm Booz Allen Hamilton ran simulations in a gaming style for each business case, there was a specific example that makes you slap your forhead and cringe. The client for Booz Allen Hamilton asked for various cases that included real estate as a factor. For fun the Booz Allen Hamilton consultant modeled the banking industry's loans and risk transfer with insurance and it's impact if housing prices dropped. As per the model built, the whole thing collapsed as soon as housing prices dropped by $1. What was the client's reaction ? "Good thing that will never happen".

Yikes !! I wonder if AIG had wargammers talking with the actuaries if we the US tax payers would have 80% ownership of AIG today ? Well, it's all an academic excersise now. Have any of you used a simulation to prevent any problems ?

The Invisible Hand podcast web site
MP3 file for Wargaming for Leaders...