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{{freeessay|isda|tail events|}}{{d|Tail event||n|}}{{nld}} | {{freeessay|isda|tail events|}}{{quote| | ||
You asked me what’s my pleasure:<br> | |||
A movie or a measure?<br> | |||
I’ll have a cup of tea<br> | |||
And tell you of my dreaming. | |||
:—Blondie, ''Dreaming'' (1979)}}{{d|Tail event||n|}}{{nld}} | |||
{{L1}}'''Statistics''': Of a range of possible independent events, one whose frequency is three or more [[Normal distribution|standard deviation]]s from the mean. An event with a low [[probability]]. <li> | {{L1}}'''Statistics''': Of a range of possible independent events, one whose frequency is three or more [[Normal distribution|standard deviation]]s from the mean. An event with a low [[probability]]. <li> | ||
'''Work life''': An unwanted outcome you didn’t expect, to which you weren’t paying attention, and, therefore, for which you don’t think you should be blamed. | '''Work life''': An unwanted outcome you didn’t expect, to which you weren’t paying attention, and, therefore, for which you don’t think you should be blamed. | ||
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Using normal distributions as a heuristic to model interdependent events is generally effective if a few conditions pertain. | Using normal distributions as a heuristic to model interdependent events is generally effective if a few conditions pertain. | ||
{{L1}}The market is generally diversified. If you carve out all the personal idiosyncrasies — stochastic modelling requires — that might explain why one rational person is prepared to sell what another is prepared to buy, it stands to reason that a buyer’s gain is a seller’s loss. In a diversified market, a sudden collapse in value for some traders means an appreciation for others, and all kinds of other effects. Like the Brownian motion in a cup of tea: not only is a spontaneous lurch of all participants on one direction at once unlikely, it is impossible. The Brownian collision that sends one molecule to the left must send another to the right. For every molecule to go left at once defies the laws of physics. Physics requires interacting independently particles to move in offsetting directions. Hence the [[emergent]] stability of a a stationary cup of tea. | {{L1}}The market is generally diversified. If you carve out all the personal idiosyncrasies — stochastic modelling requires — that might explain why one rational person is prepared to sell what another is prepared to buy, it stands to reason that a buyer’s gain is a seller’s loss. In a diversified market, a sudden collapse in value for some traders means an appreciation for others, and all kinds of other effects. Like the Brownian motion in a cup of tea: not only is a spontaneous lurch of all participants on one direction at once unlikely, it is impossible. The Brownian collision that sends one molecule to the left must send another to the right. For every molecule to go left at once defies the laws of physics. Physics requires interacting independently particles to move in offsetting directions. Hence the [[emergent]] stability of a a stationary cup of tea. Independent events that interact with each other tend to cancel each other out. ''Inter''dependent events — at least those propelled by the autonomous, self-aware animal minds ''don’t''. They can void collisions. They can turn and run in the same direction as oncoming traffic. Tea molecules can’t jump out out of the tea cup at the same time. Participants in a securities market can and, from time to time, do.<li> | ||
No individual participant, or group of participants with correlated interests dominate the market <li> | No individual participant, or group of participants with correlated interests dominate the market <li> | ||
Information about the market, and any “crowded” positions in the market, is widely held. Of course individual positions are private, proprietary and confidential, so this last condition is usually satisfied by the general assumption of liquidity: in a sufficiently deep market, no-one is big enough to have such a concentrated position, so we can take it as a given that no-one does. (In some markets there are materiality thresholds over which positions must be reported too.)</ol> | Information about the market, and any “crowded” positions in the market, is widely held. Of course individual positions are private, proprietary and confidential, so this last condition is usually satisfied by the general assumption of liquidity: in a sufficiently deep market, no-one is big enough to have such a concentrated position, so we can take it as a given that no-one does. (In some markets there are materiality thresholds over which positions must be reported too.)</ol> | ||