How finance gurus get risk all wrong
By Nassim Taleb

He is single handedly dismantling mathematical theory that has held sway for two centuries. His book, Fooled by Randomness, has sold a staggering 280 000 copies. In it Taleb uses facts to blast the way apparent experts ignore extreme events to compile investment portfolio theories. Target of his ridicule is Carl Friedrich Gauss, regarded by most academics as a mathematics genius ranking alongside Archimedes and Isaac Newton.

Taleb only half-jokingly suggests Gauss’s disciples should be jailed “for the crimes they have committed on the rest of us.” He describes some of the world’s pre-eminent economists as “frauds” and refers to their followers as “retards” and “morons”.

Backing him up are data and other facts addressing conveniently sidelined but nevertheless nagging inaccuracies of “Gaussian” approaches:

Henrik Anderson agrees: "Looking at the opportunity cost of staying out of the markets, I calculated the 5 year returns for the NASDAQ 100 and the S&P 500 vs. the return if you missed the 5 biggest up-days during the period. If you missed the 5 biggest up days, the 5 year returns for the NASDAQ and S&P500 are -17.38% and -38.09% consecutively. If you include the 5 biggest up days you would have returned -10.57% and 4.31% consecutively. The biggest 1-day gains came after severe declines in the markets; after September 11th 2001 and during the following year or so."