What's that to do with risk management? What's a Fermi Problem? According to Wikipedia, a Fermi problem is an "estimation problem designed to teach dimensional analysis, approximation, and the importance of clearly identifying one's assumptions". It is named after physicist Enrico Fermi, such problems typically involve making justified guesses about quantities that seem impossible to compute given limited available information. Long ago when I went to an interview at Cambridge, the professor posed one such Fermi problem to me - how many piano tuners in Chicago? He did not about the answer, He cared about the logic of the process by which i produced the answer. The same's true of risk measurement. Should we be more worried about the collapse of the EU or about an assasinated president? An 200 basis point move in interest rates or a drought in the mid west? One of the themes of this blog will be the need to use heuristics to guesstimate results rather than complex models.
And by the way, the answer is - there are 1523 piano tuners. Just kidding - i made it up!
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