Complexity Economics Engineering Medicine Society

What is the Relevance of Probability?

Probability is central to many concepts in economics and in science. In economics we run across probability when we compute VaR, PoD-type ratings, when we design portfolios, estimate expected returns, etc. But the concept of probability is extremely elusive. As Bertrand Russell said in 1929:


Probability is the most important concept in modern science, especially as nobody has the slightest notion what it means.

Probability is a “tool” which is supposed to give us a flavour of the likelihood of future events. But what does this really mean? If an event A is said to have a probability of occurrence of 99% does that mean it is imminent? Is it more imminent than an event B that has a chance of occurring of 95%? Does this guarantee that A will necessarily happen before B? Not at all. Both probabilities are in fact irrelevant.

First of all, when you state, for example, that in the past, out of 100 start-ups 60 fail in the first three years, this is an a-posteriori statement of the obvious which says nothing of the future reserved for YOUR start-up. All start-ups are different and therefore you cannot throw them into one basket and run a statistic. Even though the number 60/100 is mathematically correct, it is irrelevant. You can, in principle, divide any two numbers in the Universe and attribute some value to them. Nobody can stop you.

Second. Imagine someone does indeed provide you with a probability of failure of your-startup and it happens to be, say, 95%. What does it mean? Does it mean that failure is imminent? Does it mean you only have two quarters left, after which you are out of business? What does the probability really mean for YOU? It means nothing. Suppose that you don’t know that YOUR start-up will fail on December 31-st 2013. The probability of that event is, evidently, 100%. If the company will fail it will do so regardless of the probability of failure you may attach to it. Any probability which is not 100% is wrong. And that means infinitely many.

Events can only have a probability of 0 or 1. They happen or they don’t. The concept of probability, in its current form, is not relevant and its anecdotal character, which applies exclusively to the past, is erroneously used in making forward projections. Setting aside relativistic issues and quantum mechanics, there are no known laws of physics which can predict when a company will default. As a matter of fact, quantum mechanics can’t predict what a single elementary particle will do. But this IS the problem. You are interested in YOUR company or the one you’re investing in, not in populations of different companies.

A better concept than probability is that of resilience. Resilience can be computed based on physical quantities and it expresses something real and material. Just ask an engineer if he knows what the pendulum impact test is.

Established originally in 2005 in the USA, Ontonix is a technology company headquartered in Como, Italy. The unusual technology and solutions developed by Ontonix focus on countering what most threatens safety, advanced products, critical infrastructures, or IT network security - the rapid growth of complexity. In 2007 the company received recognition by being selected as Gartner's Cool Vendor. What makes Ontonix different from all those companies and research centers who claim to manage complexity is that we have a complexity metric. This means that we MEASURE complexity. We detect anomalies in complex defense systems without using Machine Learning for one very good reason: our clients don’t have the luxury of multiple examples of failures necessary to teach software to recognize them. We identify anomalies without having seen them before. Sometimes, you must get it right the first and only time!

1 comment on “What is the Relevance of Probability?

  1. Reblogged this on muunyayo .

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: