Nassim Taleb, hedge fund manager and author of “The Black Swan” discusses the limitations of financial models. He argues that most of the world is driven by Fat-Tailed processes and that using normal distributions in risk analysis is not accurate. Taleb explains that Modern Portfolio Theory, which uses a mix of stocks and bonds, does not make sense mathematically and empirically, and only worked because interest earned in bonds used to be able to finance losses in the stock market.
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