4 ms·

The 62 year estimate is based upon an assumption of normally distributed data. Everyone in the industry knows the distributions are significantly fat-tailed.

by KMag 11y ago

The 62 year estimate is based upon an assumption of normally distributed data. Everyone in the industry knows the distributions are significantly fat-tailed. Maybe things are getting more volatile, but the 62 year estimate is just mumbo jumbo. Edit: also implicit in the 62 year estimate is constant volatility, but the same article mentions changes in the volatility of volatility... third order changes in something he was assuming was constant earlier.

finance-geek 11y ago
Totally on point. That is why 100-yr events seem to happen every 7 or 8 years :-) Normal distribution assumptions are great for coursework, terrible when you are managing real money.
- shlomo_goystein 11y ago
  Things happen every 7 years because of the Shmitah. Call the jews and tell them to learn from history! They've been crashing markets since the tower of babel. And while you're at it, call Soros and tell him to take his ethnocidal hands off Europe. And call the FBI and report him. Shalom!
- shlomo_goystein 11y ago
  Goyim are gonna hand all their possessions over to the nation of Israel after the big Shmitah crash... at a 90% discount! Good luck suckas!
- sfilipov 11y ago
  Slightly off-topic but we are really bad at predicting these "very unlikely events" that actually happen more often than expected. Whenever I hear a similar story, I am reminded of the 3 nuclear reactor disasters (Three Mile Island, Chernobyl, Fukushima), each of which shouldn't have happened in 15000 years.
  - iaw 11y ago
    Where did you get the 15,000 years number? I have never seen that before and would love it if you could provide more resources.
    - sfilipov 11y ago
      It is very anecdotal, I believe I read it in an article long time ago around the time the Fukushima disaster happened. It is probably an inaccurate number. The point is, all 3 faults/human errors shouldn't have happened according to statisticians/mathematicians.
cousin_it 11y ago
Maybe there could be some technical result like "if everyone in the market assumes distribution X and trades accordingly, that makes the real distribution more fat-tailed than X"? No idea if something like that could be true...
- downer70 11y ago
  Or maybe human behavior and personality consistently resists the enforcment of technical rules, and watches for, and then willfully denies attempts to restrain behavior it (subsets of the collective population) instinctively desires to engage in. Maybe some of us know that we're being watched, and simply defy any stupid egghead's function curves, for the sheer amusement of seeing disappointed faces. Maybe there are sadistic people roaming free, and they feed on the souls of the damned. How would that fit in with modern quantitative economics?
  - eru 11y ago
    If some quants can predict these alleged flights of fancy, they'll trade against them and make some good money.
    - downer70 11y ago
      Acting, or according to your context merely "betting" against an adversary is fine, but this assumes the capacity to act against an adversary, and that the actions taken will be big enough to have an effect. You can't realistically take actions against a belligerent force that has an overwhelming capacity to watch your every action and imprison or execute you. You can't take actions against forces that exist outside a legal framework and the juridictions you are subject to. Placing bets is not taking direct action. It means sitting on the sidelines, and hoping that legal mechanisms take their natural course in a civilized society.
  - drdeca 11y ago
    Well, that would depend on the size of that population, would it not? A single middle-class person working to make as contrary to prediction market choices as possible would, I think, have a not significant influence Even if they optimized for the size of the influence as well as the strangeness. I don't expect the total population of people doing that to have a significant impact on the market. There isn't much reason to do it, and it probably costs money over time, leading the people who do that to have less money over time,and so for their doing that to have less and less of an impact over time.
rdlecler1 11y ago
A normal distribution assumes independent random samples. That clearly doesn't happen in a market where people and algos are reacting to the same news. Moves end up more like step functions in both panicked or excited market and will then overshoot buying and selling.
joosters 11y ago
I thought that it was customary to add a 'smile' to most financial distributions (i.e. increased probability of extreme events), I don't think that anyone believes that a normal distribution accurately measures anything much in finance.

by KMag 11y ago

finance-geek 11y ago

Totally on point. That is why 100-yr events seem to happen every 7 or 8 years :-) Normal distribution assumptions are great for coursework, terrible when you are managing real money.

shlomo_goystein 11y ago
Things happen every 7 years because of the Shmitah. Call the jews and tell them to learn from history! They've been crashing markets since the tower of babel. And while you're at it, call Soros and tell him to take his ethnocidal hands off Europe. And call the FBI and report him. Shalom!
shlomo_goystein 11y ago
Goyim are gonna hand all their possessions over to the nation of Israel after the big Shmitah crash... at a 90% discount! Good luck suckas!
sfilipov 11y ago
Slightly off-topic but we are really bad at predicting these "very unlikely events" that actually happen more often than expected. Whenever I hear a similar story, I am reminded of the 3 nuclear reactor disasters (Three Mile Island, Chernobyl, Fukushima), each of which shouldn't have happened in 15000 years.
- iaw 11y ago
  Where did you get the 15,000 years number? I have never seen that before and would love it if you could provide more resources.
  - sfilipov 11y ago
    It is very anecdotal, I believe I read it in an article long time ago around the time the Fukushima disaster happened. It is probably an inaccurate number. The point is, all 3 faults/human errors shouldn't have happened according to statisticians/mathematicians.

cousin_it 11y ago

Maybe there could be some technical result like "if everyone in the market assumes distribution X and trades accordingly, that makes the real distribution more fat-tailed than X"? No idea if something like that could be true...

downer70 11y ago
Or maybe human behavior and personality consistently resists the enforcment of technical rules, and watches for, and then willfully denies attempts to restrain behavior it (subsets of the collective population) instinctively desires to engage in. Maybe some of us know that we're being watched, and simply defy any stupid egghead's function curves, for the sheer amusement of seeing disappointed faces. Maybe there are sadistic people roaming free, and they feed on the souls of the damned. How would that fit in with modern quantitative economics?
- eru 11y ago
  If some quants can predict these alleged flights of fancy, they'll trade against them and make some good money.
  - downer70 11y ago
    Acting, or according to your context merely "betting" against an adversary is fine, but this assumes the capacity to act against an adversary, and that the actions taken will be big enough to have an effect. You can't realistically take actions against a belligerent force that has an overwhelming capacity to watch your every action and imprison or execute you. You can't take actions against forces that exist outside a legal framework and the juridictions you are subject to. Placing bets is not taking direct action. It means sitting on the sidelines, and hoping that legal mechanisms take their natural course in a civilized society.
- drdeca 11y ago
  Well, that would depend on the size of that population, would it not? A single middle-class person working to make as contrary to prediction market choices as possible would, I think, have a not significant influence Even if they optimized for the size of the influence as well as the strangeness. I don't expect the total population of people doing that to have a significant impact on the market. There isn't much reason to do it, and it probably costs money over time, leading the people who do that to have less money over time,and so for their doing that to have less and less of an impact over time.

rdlecler1 11y ago

A normal distribution assumes independent random samples. That clearly doesn't happen in a market where people and algos are reacting to the same news. Moves end up more like step functions in both panicked or excited market and will then overshoot buying and selling.

joosters 11y ago

I thought that it was customary to add a 'smile' to most financial distributions (i.e. increased probability of extreme events), I don't think that anyone believes that a normal distribution accurately measures anything much in finance.