Nassim Taleb, Principal, Universa Investments, distinguished Professor of Risk Engineering and co-Director of the Research Center for Risk Engineeering at the Polytechnic Institute of New York University and author of the Black Swan has revealed his heuristics formula at the GAIM 2011 conference in Monaco, as he continues to discredit traditional forms of risk calculation.
I have been trying most of my life to explain that traditional risk models that people use do not work, said Taleb. And obviously, we now have evidence that those who dont have those models, have better sense of heuristics and intuition than those who do. Value-At-Risk (VAR)doesnt work, never works and never will work.
The Heuristics formula that Taleb revealed is computing the model or risk model at parameter p. The formula itself is p+x%, p-x% (where x% is the average deviation.)
The model or measure, includes the stress test (p is the stress test, say -15%, -20%, -25%)
VaR calculates the risk associated with open positions based on historic volatility, holding period and given confidence levels .
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