Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

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Andrew Moe

10/16/05
What I Know About Fat Tails

The madman clutches a bloody knife above his head, gathering strength for a strike on your throat. Pure rage pours down the edge of the blade as it slices your skin before you have a chance to react. Taking his time, the fiend hacks away at your life, sure of purpose until the bitter end. As the vultures circle, you are surprised to be unsurprised by the unlikelihood of it all. For in our society, you have been preconditioned to accept the black swan.

If you've ever owned a motorcycle, you know that everyone knows someone else who has died from a terrible crash. Even people who don't have a real story adopt a particularly gruesome one as their own. The same is true of natural disasters, market crashes, corporate collapses, sudden illness and all other improbable anomalies. When lightning strikes, people take notice. And people love to tell a good story.

These stories cause others to overreact. Heightened prospective retrospection frightens us to the point of monetary engagement. Insurance exists for any kind of risk. You can be insured 2 or 3 times over, reinsured and partially insured in a variety of complicated structures. J Lo has booty insurance. Yet despite our exhaustive preparations, it's different under the knife. When a perfect storm of abhorrent magnitude bears down on your position, risk takes on new meaning.

With natural disaster fresh in our minds, economic disaster struck these past two weeks. Screens across the country dripped red with losses, driving many to the exits in a frenzy. Dr. e long ago led a discussion on panic, pedestrian arches and mice running for their lives*. I suspect the vigilantes were active this past week, perhaps even joining the plunge protection team on Friday -- if only for a day.

All Ahead Full, Andrew Moe

* Self-organized queuing and scale-free behavior in real escape panic

"Numerical investigations of escape panic of confined pedestrians have revealed interesting dynamical features such as pedestrian arch formation around an exit, disruptive interference, self-organized queuing, and scale-free behavior. ... For mice escaping out of a water pool, we found that for a critical sampling rate the escape behavior exhibits the predicted features even at short observation times."