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Normal distribution: Difference between revisions
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Then there are those “[[ten sigma event|ten-sigma” events]] — like, ooooh, say the correlation of a Russian government default with a spike in the price of all other G20 Treasury securities, just to pick something at random — that should, in the world of normal distributions, happen only once in every 10<sup>24</sup> times — say, ten million years — but, since investment decisions are not even remotely independent events, happened once — and only needed to happen once, to blow [[Long Term Capital Management]] and much of the market to smithereens — in ''four'' years. | Then there are those “[[ten sigma event|ten-sigma” events]] — like, ooooh, say the correlation of a Russian government default with a spike in the price of all other G20 Treasury securities, just to pick something at random — that should, in the world of normal distributions, happen only once in every 10<sup>24</sup> times — say, ten million years — but, since investment decisions are not even remotely independent events, happened once — and only needed to happen once, to blow [[Long Term Capital Management]] and much of the market to smithereens — in ''four'' years. | ||
These persist in occurring “against all odds” because they are a product of ''dependent'' events. The distribution of patrons’ arrival times at a cinema are normally distributed around the prescribed showtime because, outside that control, the time at which ''I'' show up has no bearing, or dependency, on the time [[Mrs Pinterman]] shows up. The chance that all 400 people should arrive and try to enter the theatre at the same moment is more or less nil. | These persist in occurring “against all odds” because they are a product of ''dependent'' events. The distribution of patrons’ arrival times at a cinema are normally distributed around the prescribed showtime because, outside that control, the time at which ''I'' show up has no bearing, or dependency, on the time [[Mrs. Pinterman]] shows up. The chance that all 400 people should arrive and try to enter the theatre at the same moment is more or less nil. | ||
But when Mrs. Pinterman then cries “fire” the situational dynamic is very different | But when [[Mrs. Pinterman]] then cries, “fire” the situational dynamic is very different: ''everyone'' tries to leave at once. Even those who didn’t hear Mrs. Pinterman directly, because they instinctively copy everyone else, who did. | ||
When assessing probabilities, therefore, pay attention to the dependency of the events. If events | When assessing probabilities, therefore, pay attention to the dependency of the events. If two events can influence each other — you bought a stock, it went up in price, so I bought it too, kind of thing — ''[[normal]] distributions do not apply. | ||
This seems an obvious lesson; the JC feels less patronising about stating it since failure to heed it led to the collapse of [[LTCM]] ''and'' the [[global financial crisis]]. This from someone who really should have known better: | This seems an obvious lesson; the JC feels less patronising about stating it since failure to heed it led to the collapse of [[LTCM]] ''and'' the [[global financial crisis]]. This from someone who really should have known better: | ||