“The seemingly improbable happens all the time in financial markets. A year earlier, the Dow had fallen 7.7 percent in one day. (Probability: one in 50 billion.) In July 2002, the index recorded three steep falls within seven trading days. (Probability: one in four trillion.) And on October 19, 1987, the worst day of trading in at least a century, the index fell 29.2 percent. The probability of that happening, based on the standard reckoning of financial theorists, was less than one in 1050—odds so small they have no meaning. It is a number outside the scale of nature. You could span the powers of ten from the smallest subatomic particle to the breadth of the measurable universe—and still never meet such a number.

So what’s new? Everyone knows: Financial markets are risky. But in the careful study of that concept, risk, lies knowledge of our world and hope of a quantitative control over it.

For more than a century, financiers and economists have been striving to analyze risk in capital markets, to explain it, to quantify it, and, ultimately, to profit from it. I believe that most of the theorists have been going down the wrong track. The odds of financial ruin in a free, global-market economy have been grossly underestimated.“

Ah, but are we living today in a “free, global-market economy?” 


Great question!