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The second time-bound scenario tells us something small, but meaningful about the history of the world. The snapshot does not. | The second time-bound scenario tells us something small, but meaningful about the history of the world. The snapshot does not. | ||
====Assembling a risk period out of snapshots==== | ====Assembling a risk period out of snapshots==== | ||
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But there the longer the period, the greater that change of loss. And the harder things are to calculate. We are doubly motivated to keep liquidity periods as short as as possible. | But there the longer the period, the greater that change of loss. And the harder things are to calculate. We are doubly motivated to keep liquidity periods as short as as possible. | ||
==== | ====[[Glass half full]] and multidimensionality==== | ||
Here is where history — ''real'' history, not the synthetic history afforded by [[data modernism]] — makes a difference. | |||
''On a day'', the realistic range in which a stock can move in a liquidity period — its “gap risk” — is relatively stable. Say, 30 percent of its [[market value]]. (This [[market value]] we derive from technical and fundamental readings: the business ’s book value, the presumption that there is a sensible [[bid]] and [[ask]], so that the stock price will oscillate around its “true value” as bulls and bears cancel each other out under the magical swoon of [[Adam Smith]]’s [[invisible hand]]. | |||
But this view is assembled from static snapshots which don't move at all. Each frame carries ''no'' intrinsic risk: the ''illusion'' of movement emerges from the succession of frames. Therefore [[data modernism]] is not good at estimating how long a risk period should be. Each of its snapshots, when you zero in on it, is a still life: here, shorn of its history, a “[[glass half full]]” and a “[[glass half empty]]” look alike. | |||
We apply the our risk tools to them as if they were the same: ''assuming the market value is fair, how much could I lose in the time it would realistically take me to sell''? Thirty percent, right? | |||
But they are ''not'' the same. | |||
If a stock trades at 200 today, it makes a difference that it traded at 100 yesterday, 50 the day before that, and over the last ten years traded within a range between 25 and 35. This history tells us this glass, right now, is massively, catastrophically over-full: that the milk in it is, somehow, freakishly forming an improbable spontaneous column above the glass, restrained and supported by nothing by the laws of extreme improbability, and it is liable to revert to its Brownian state at any moment with milk spilt ''everywhere''. | |||
With that history might think a drop of 30pc of the milk is our ''best'' case scenario. | |||
=== It’s the long run, stupid=== | === It’s the long run, stupid=== |