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{{L1}}'''Statistics''': Of a range of possible independent events, one whose frequency is three or more standard deviations 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 standard deviations from the mean. An event with a low probability <li> | ||
'''Work life''': An unwanted outcome you didn’t expect and don’t think you should be blamed for. | '''Work life''': An unwanted outcome you didn’t expect and don’t think you should be blamed for. | ||
</Ol> | |||
We are, as the JC frequently complains, in swoon to the reducibility of all things. This usually involves converting all things that we do and the l that happen to us into numerical data points. Data points in themselves are no more naturally effable than “things that happen to us”, of course, but numbers have the quality of submitting easily to aggregation and symbolic manipulation statistical techniques, in a way that “things that happen to us” do not. | |||
In the context of trading derivatives, things that (a) you didn't reasonably expect and that (b) bugger up your contract. | One can calculate an mean median and mode of a number, and one can subject standardised events to probability calculations. In the same way that I can calculate the probability of rolling consecutive sixes on a die (1/36), so we can calculate the probability of rain tomorrow, a tax cut in the spring, or a thirty point intraday drop in the NASDAQ. | ||
Numbers are under control. They ''behave''. The bend to the spreadsheet ’s will. | |||
Except, as David Viniar’s immortal words remind us, the events these numbers represent — the territory for which they are a map — are wont to have other ideas. | |||
There is a great difference between a rolling die and a stock market. A rolling die is a “[[nomological machine]]”: a carefully constrained, sealed environment designed specifically to yield the theoretical outcome. The map is, as far as engineering permits, materially identical to the territory. We can, indeed, generate an indistinguishable outcome purely by running the model with a random number generator. The machined dice, the flat, constrained surface — these are a representation of the reality, which is the hypothetical model, and not the other way around. A loaded die is a flawed machine. You don't chuck out the theory: you chuck out the equipment. | |||
In any case these are the circumstances in which the rules of probability prevail. Should the universe misbehave | |||
====Derivatives trading==== | |||
In the context of trading derivatives, things that (a) you didn't reasonably expect and that . (b) bugger up your contract. | |||
=====Credit defaults===== | =====Credit defaults===== | ||
A swap being a private, bilateral affair, the most obvious category of tail events is “things which mean your counterparty cannot, or will not, or has not, performed its end of the deal”. | A swap being a private, bilateral affair, the most obvious category of tail events is “things which mean your counterparty cannot, or will not, or has not, performed its end of the deal”. | ||