Comment let's hope Mandelbrot fails (Score 1) 323
Mandelbrot talks about avoiding crises and hence the need for better risk models.
Risk models always existed and they have become more and more sophisticated over the last 100 years. Funny enough crises in markets haven't become less.
E.g. In 1987 a lot of people were using portfolio "insurance" where stock-market portfolios were protected by selling futures dynamically against their positions. After the crash those very "insurances" were blamed for the crash because they increased the selling.
Similary crises such in Russia 98 spilled over to other markets in other countries simply because the same market participants were geared to those diverse markets and had to wind down positions.
Even if there isn't an immediate need to go into cash to cover losses elsewhere the risk models will kick in because those those models advise to reduce exposure because overall volatility is increasing.
I expect that the more sophisticated the models become to iron out short term market glitches the bigger the damage will be when one of those rare events hits which are believed to be so unlikely. That is simply so because all events will be interconnected due to financial modelling.
In any case, in an overall evolutionary perspective it doesn't make sense that risks are always correctly judged otherwise no one would invest in novel ideas or markets.
Some markets do have an overall negative return across the whole industry. E.g. mining. If people were rational there wouldn't be any exploration for natural resources at all. But because some hope to strike it rich with their gold or oil stock tons of money are still invested - and that is very usefull for society overall.
BTW, I am intruiged that Mandelbrot mentions the mapping of the human genome. Surely if the human genome is ultimately fully understood and any disease can be treated then most likely the development of the human genome will come to a standstill.
Cheers
Risk models always existed and they have become more and more sophisticated over the last 100 years. Funny enough crises in markets haven't become less.
E.g. In 1987 a lot of people were using portfolio "insurance" where stock-market portfolios were protected by selling futures dynamically against their positions. After the crash those very "insurances" were blamed for the crash because they increased the selling.
Similary crises such in Russia 98 spilled over to other markets in other countries simply because the same market participants were geared to those diverse markets and had to wind down positions.
Even if there isn't an immediate need to go into cash to cover losses elsewhere the risk models will kick in because those those models advise to reduce exposure because overall volatility is increasing.
I expect that the more sophisticated the models become to iron out short term market glitches the bigger the damage will be when one of those rare events hits which are believed to be so unlikely. That is simply so because all events will be interconnected due to financial modelling.
In any case, in an overall evolutionary perspective it doesn't make sense that risks are always correctly judged otherwise no one would invest in novel ideas or markets.
Some markets do have an overall negative return across the whole industry. E.g. mining. If people were rational there wouldn't be any exploration for natural resources at all. But because some hope to strike it rich with their gold or oil stock tons of money are still invested - and that is very usefull for society overall.
BTW, I am intruiged that Mandelbrot mentions the mapping of the human genome. Surely if the human genome is ultimately fully understood and any disease can be treated then most likely the development of the human genome will come to a standstill.
Cheers
