Image by Arenamontanus via Flickr

I found this interesting video on YouTube, where Benoit Mandelbrot, founder of the chaos theory, and Nicholas Taleb, author of the Black Swan, discuss the probabilities of the improbable. Basing their discussions on the fact that each time a highly improbable event does not occur it becomes even more improbable and therefore causing a wrong feeling of security, they stress that such events are not normally distributed and still can occur any time. Some recent examples found during the last days in the press:

1. the mathematical impossibility of negative swap spreads [www]
2. the link between Mrs Watanabe's mood swings and the price level of exotic currencies, distant equity markets and sundry commodities [www]
3. the "Great Moderation" argument that brought back volatility [www]

So are we now posed to abandon historical series and calculate probabilities based on previous performance? Should we start to look increasingly for self similarity in financial markets? Or should we just get rid of butterflies?

www.HedgeFund-Lawyer.com

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