Shared by JohnH

We met Christopher when he wrote about his Black Swan Protection Protocol http://austrianschool.blogspot.com/2010/02/black-swan-protection-protocol-approach.html He’s recently launched a new site and has more market-centric NNT related content (see Blog) I’m sure you’ll appreciate. Check it out http://www.scalavolpe.com/index.html

Let’s come back to the present.  On May 6, 2010, the Dow Jones fell nearly 10% in a matter of minutes.  Not weeks.  Not days.  Not one day.  But minutes.  Now, it’s true that it recovered significantly from that low point before the trading day ended.  But we mustn’t allow that fact to cloud the basic truism that the market could plunge by so much, with a rapidity never seen before.  Again, this leads us to the fractal concept: if the market could plunge 10% in one day, why can’t it plunge 10% in one minute?  Could it plunge 22% in one minute?  Or perhaps more?  On May 5 had you suggested such a thing, you’d be looked at as crazy; on May 7, realistic.

The bottom line here is, as investors we should consider the power of applying fractals to our hedging strategies, by stepping outside convention and imagining what the possibilities might be based on the evidence at hand.  This will undoubtedly remove many of the limits we often self-impose on what’s “possible” in the markets, and allow more creative hedging approaches to flourish.

Shared by JohnH

HatTip to Dave Lull

I expect to have a conversation with Nassim Nicholas Taleb, author of Fooled by Randomness and The Black Swan, in the next couple of days. He’s a very smart and talkative fellow, and I suspect he would fit into a Freakonomics Radio podcast very well. What would you like me to ask him?

Nassim Nicholas Taleb. DRAFT. Summary of Causes: The interplay of the following five forces, all linked to the misperception and hiding of …
www.fooledbyrandomness.com/crisis.pdf

Tell me if you understand the problem in its full simplicity: former regulators and public officials who were employed by the citizens to represent their best interests can use the expertise and contacts acquired on the job to benefit from glitches in the system upon joining private employment — law firms, etc.

Think about it a bit further: the more complex the regulation, the more bureaucratic the network, the more a regulator who knows the loops and glitches would benefit from it later, as his regulator edge would be a convex function of his differential knowledge. This is a franchise. (Note that this franchise is not limited to finance; the car company Toyota hired former U.S. regulators and used their “expertise” to handle investigations of its car defects).
I have several remarks.

First, the more complicated the regulation, the more prone to arbitrages by insiders. So 2,300 pages of regulation will be a gold mine for former regulators. The incentive of a regulator is to have complex regulation.