CSCI 102: Introduction to Computational Modeling

Chapter 1: The Modeling Process

I am never content until I have constructed mechanical model of the subject I am studying. If I succeed in making one, I understand; otherwise I do not.

I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the state of Science, whatever the matter may be.

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– William Thomson, Lord Kelvin (1824 - 1907)

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– William Thomson, Lord Kelvin (1824 - 1907)

All models are wrong, but some models are useful

– George Box (1919 - )

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What is Wrong with this Model? What is Useful About It?

Case Study: Value at Risk

• 1% VaR of $1M: On a given day, there is a 1% chance that the value of your stock portfolio will fall by $1M.

• Let’s build a model….

Black Swan!

• To me, VaR is charlatanism because it tries to estimate something that is not scientifically possible to estimate, namely the risks of rare events.

- Nassim Taleb

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