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Minyan Mailbag: Risk and Revolution



Editor's Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof. Succo -

I was watching an unnamed network this morning and what I heard shows exactly what you have been talking about with regard to risk. The commentator said something to this effect:

"The market will go down today, and as with these situations all the time, as we get farther away from this situation the market will come back to where we are today."

I think this is a dangerous statement. This statement assumes and people believe the market will "always" come back.

My question to them is what if one time it doesn't. There just isn't any concern for the risk that is out there.

I hate that something like this has happened. It is terrible and I wouldn't wish it on anyone, but people need to realize the risks that are out there.

Minyan D


Thank you for this leading question.

This gets at the nature of risk and probabilities. The market "always" coming back is merely inductive reasoning. If the sun rises in the east everyday, it always rises in the east. Inductive reasoning (empirical evidence) can lead to disaster when it is out of context.

The market always coming back does not account for that one time that it doesn't. This is a structural issue. Option prices said yesterday that if we have a shock, any shock, the market will come back.

The nature of risk (of the universe) is elusive. It sets the stage for the exception, and the exception therefore becomes a revolution.

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