In the risk business one is not so much concerned with the probability of loss as the expected size of the loss. We explore this idea for various probability distributions by looking at the expected loss given that the loss exceeds a certain threshold. We see for fat tails that the expected loss exceeds the threshold itself.
In order to “cluster” observations we need some measure of how alike or different they are. This leads naturally to the concept of a distance between observations. Here we explore how to calculate the distance between observations made up of numerical and ordinal data.