Monday, September 15, 2008

Whipped by the Fat Tail

Statisticians speak of probability distributions with a relatively high likelihood of states far from the mean as having "fat tails." It seems that many of the distributions used to estimate risk in the financial world had fatter tails than the estimators assumed. The CAC40 is down 5.6% today, Lehman is bankrupt, Merrill Lynch has been eaten by Bank of America, and AIG is teetering. As we wait to see just how black this Monday will be on the U.S. stock exchanges, one thing is clear: there is no point in carrying on with the old economic debate. It no longer matters whether France will meet its Stability and Growth Pact targets or whether Trichet thinks he must keep interest rates high forever. We are now in an emergency, and the premium will be on innovative ideas, not eloquent defenses of orthodoxy. Perhaps it's fitting that the curse "May you live in interesting times" is attributed to a Chinese philosopher. We are living in interesting times, and the Chinese, pragmatists as well as philosophers, are sitting on a mountain of cash and in a position to pick up a lot of assets at bargain prices.

1 comment:

Anonymous said...

^^ nice blog!! ^@^

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