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Minyan Mailbag: Dis-information & Probability



Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.

Hello John,

I don't think I have ever written to you. I would just LOVE to understand a small portion of what you discuss. Hopefully, with time, I will. I just read your small piece on dis-information. That prompted me to write you. May I suggest you read the article written in the NYT on August 5, 2005 by Jad Mouawad, titled "Gulf Hurricanes Are Latest Kink in Oil Chain".

Also, I would appreciate your thoughts on this article if you read it. Many thanks and may you have a wonderful holiday weekend, under the circumstances.

Minyan Art


As most can tell, I am not an expert on oil, but I can comment on what the article reveals about probability.

The article indicates that the oil system is a fragile one where disruptions can occur from a number of things. Because it has not experienced disruptions in the past, market participants under-estimate events that can catastrophically alter supply and delivery.

We see this in almost all areas where markets under-estimate tail risks. Prices of volatility instruments like options are consistently mis-priced from a risk point of view.

If all goes fine, risk doesn't matter in hindsight. But risk of catastrophe looking forward must always be discounted. It is the under-estimation of this risk going forward that leads to shocks.

In this case after a shock, the market then recognizes the "new" risk and will likely incorporate that in price going forward for some time (that is, until they "forget" again).

I have been called overly conservative by many people. But little do they know that I do take risks when warranted, but I never sell risk too cheaply.

Prof. Succo

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