Great post above above.Uncertainty is an essential component of risk. If there were no uncertainty there would be no risk, because the outcome would be perfectly known. In practice, there are few investments that have zero risk because the future is always uncertain. There are some things we can predict, but the future is never completely knowable.
Knowing more about your investments can help reduce risk, but can never eliminate it. Predictive analytics cannot foresee all possible perturbations to the system, and I'm not sure the analogies with CERN and NASA are appropriate because in large part the risks of physics-based projects can be deduced from physical principles and logical analyses of the things that could go wrong. Markets do not operate by purely logical rules; human behavior and emotional reactions have enormous impacts on market behavior, and those are much harder to predict with any useful level of accuracy.
Financial markets have been going boom and bust on a cyclic pattern since long.There is hardly any uncertainity in that, but rather a distinct probabilty that it will happen if the risk taking is not curbed. The fact that the symptoms were present since early 2006Uncertainty is an essential component of risk. If there were no uncertainty there would be no risk, because the outcome would be perfectly known. In practice, there are few investments that have zero risk because the future is always uncertain. There are some things we can predict, but the future is never completely knowable.
Knowing more about your investments can help reduce risk, but can never eliminate it. Predictive analytics cannot foresee all possible perturbations to the system, and I'm not sure the analogies with CERN and NASA are appropriate because in large part the risks of physics-based projects can be deduced from physical principles and logical analyses of the things that could go wrong. Markets do not operate by purely logical rules; human behavior and emotional reactions have enormous impacts on market behavior, and those are much harder to predict with any useful level of accuracy.
True humans are animals...but where was the regulator?Great post above above.
The more I learn about this topic, the less I expect outcomes to fit the "normal distribution" pattern. Humans are animals, we do not act rationally much of the time. Any theory (investment or otherwise) based on the notion that individuals en mass routinely employ rational and emotion-free decision-making is well .. somewhat irrational.
http://www.yourwealthadvisor.ca/app...22635-how-human-psychology-drives-the-economy
http://www.amazon.ca/Animal-Spirits-Psychology-Economy-Capitalism/dp/0691142335
Often primitive and automatic response mechanisms in the brain go into action long before we are conscious of having made any decision.
Later we justify or rationalize that automatic response on a conscious level, but the actual decision was made below the level of consciousness, on a gut or instinctual level.
JM Keynes was first to refer to this as our "animal spirits". Understanding this notion won't remove the fat-tails from the distribution pattern of actual outcomes but it does help explain them. I also gives us a broader understanding the true nature of uncertainty as it relates to human behaviour.
All of this stuff is easy to spot in hindsight. What's hard is predicting the future with a useful degree of certainty.The Jim Saxton report to the US Congress in May 2008 quoted in my above presentations clearly identify the early fault lines that had started appearing since 2003.
If it were simple to predict prices and the ensuing market risks accurately, wouldn't we all be millionaires?Market risks are based on prices, much simpler to predict than complex operational risks that CERN and NASA face
