Yes, in terms of market dynamics that is correct. However, what I mean with falling off a cliff is that we rarely have the catastrophe that we might imagine we have. When faced with an existential crisis, we tend to change our behaviour to avoid the worst outcome. Exceptions to this rule clearly exist, most notably World Wars I and II. But the financial crisis is a classic example of a system about to fail and break down completely, but then being rescued in the nick of time. Similarly, in the geopolitical sphere, we never had a nuclear war and none of the wars since WWII have escalated to a disastrous level. Regional catastrophes like in Syria, yes, but actors still always stop short of the ultimate step of total war. Similarly, I have to laugh whenever I see reports of Putin using nuclear weapons or attacking NATO member states. That is utter nonsense, in my view.
Also how do you marry reversion to the mean with powerlaws? Months ago you talked about a paper that showed how only a tiny percentage of all listed stocks outperform. As in my question is do you take the mean of that powerlaw or what sort of distribution do you use?
Power laws have no reversion to the mean, or very little of it. That is why I’m a day to day basis I have become quite skeptical of reversion to the mean arguments.
#5 is a bit strange wrt stock price forcasting, I have always heard, highway to hell but stairway to heaven. Elevator down and stairway up.
Yes, in terms of market dynamics that is correct. However, what I mean with falling off a cliff is that we rarely have the catastrophe that we might imagine we have. When faced with an existential crisis, we tend to change our behaviour to avoid the worst outcome. Exceptions to this rule clearly exist, most notably World Wars I and II. But the financial crisis is a classic example of a system about to fail and break down completely, but then being rescued in the nick of time. Similarly, in the geopolitical sphere, we never had a nuclear war and none of the wars since WWII have escalated to a disastrous level. Regional catastrophes like in Syria, yes, but actors still always stop short of the ultimate step of total war. Similarly, I have to laugh whenever I see reports of Putin using nuclear weapons or attacking NATO member states. That is utter nonsense, in my view.
Also how do you marry reversion to the mean with powerlaws? Months ago you talked about a paper that showed how only a tiny percentage of all listed stocks outperform. As in my question is do you take the mean of that powerlaw or what sort of distribution do you use?
Power laws have no reversion to the mean, or very little of it. That is why I’m a day to day basis I have become quite skeptical of reversion to the mean arguments.