Standing in Harvard Square with leaflets and a big sign
15/06/2012 § 6 Comments
There was, floating around the Web recently, an analysis of the current economic risks. It had probabilities of each major economic area pulling through without collapse, 80% for the US, 70% for the EU, etc. The two points seemed to be that each area still had a good chance of being fine, but the probability that nothing would happen was fairly low.
What struck me was that the analysis treated the risks as independent. Of course, they aren’t. If the eurozone were to collapse, to whom would the US and China (and NZ) sell their exports? Those economies would suffer, too. The joint probabilities are key.
Dani Rodrik tells a story about what could happen, the joint probabilities presented in prose. Entitled ‘The End of the World as We Know It’, it is a tale of worry and woe that ends thus:
A remote scenario? Perhaps, but not remote enough.
I’ll leave you to follow the link.