The Fundamental Inadequacy of Probability Theory as a Foundation for Modeling Systemic and Extreme Risk in a Banking Context

Abstract

The comet may have taken an infinite number of other trajectories from point to point, the finitely many points observed on its previous path do not say how the actual trajectory continues in the future or at the other points, respectively. In a similar way, a finite number of statistical data may not be safely extrapolated into the future. Nonetheless, we may rely on the “habits of nature”, which, as experience according to Leibniz shows, let her causes recur in a similar manner throughout time – put in the image of the comet: it may be safely assumed a path with no wild or radical changes.