The Sum Of All Fears   Leave a comment

Change doesn’t come gradually in our world.

How did a chauffeur’s mistake start the First World War

The chauffeur was driving the carriage carrying Archduke Franz Ferdinand of Austria.It seems he took a wrong turn,bringing the carriage down an unintended road and to halt in front of a Serb student,Gavrilo Princip,who stepped up and shot him.In fact,Princip had intended to assassinate Franz Ferdinand that morning,but thought he had failed and had actually given up and was headed home.This mistake made it possible for the assassination to take place.It kicked off a spiral of events which took Europe to the brink of war in just over a month.We think great events should have great causes,but out world is arranged in such a way that this is not always or even often true.

So small things can lead to major consequences

In pondering how an accident can cause global war,there’s a deeper question to consider what is it about the world that makes this possible It is definitely not the case for lots of things we know.Fill a bathtub with water and give it a tiny stir with your finger.You can be sure only small things will happen: a huge wave will never leap up out of it.Here small causes always have small effects.But there are systems we know where this cause-effect link breaks down.The best example is the process in the earth’s crust that creates earthquakes.Stress builds up gradually in the crust as continental plates try to slide past one another,but friction sticks them together.When two adjacent portions of crust do eventually slip,you get an earthquake.All earthquakes have the very same cause a tiny slippage between two rocks,perhaps even on a microscopic scale.Whether the resulting quake is large or small depends on how that one events leads to others.The process is extraordinarily unpredictable.The largest earthquakes are 10 million times more powerful than the smallest,even though they have the very same cause.The science of complex systems has developed an understanding of systems of this kind,in which abrupt upheavals are a natural part of the dynamics.Such systems are common and leave a mathematical signature.

How does this apply to business events

The stock market crash of 1987 was a huge event that came out of nowhere.Not too long before the crash people were arguing that a new product on the market,portfolio insurance,would make a crash impossible.Afterwards,people came up with all kinds of explanations for what happened,and one of the most frequently cited causes was none other than portfolio insurance,which automatically sold stocks as the market fell,driving prices down even more.We humans are very good at rationalisation and making up stories that seem to make sense out of things.What gets less attention is that the 1987 crash,as violent as it was,doesn’t stand out of stock market history as being truly unusual.The one thing we know about markets is that they are particularly prone to large violent movements,either up or down.Mathematicians say that market probabilities have fat tails,which means that big upheavals are much more likely than they would normally expect.

Are stock markets crashes random

During the Flash Crash of 6 May 2010 the Dow Jones Industrial Average lost 9.2% of its value in a few minutes the largest drop in such a short time ever.Popular speculation pointed to a computer error,or perhaps a ‘fat finger’ a trader hitting the wrong key and initiated a mistaken trade.One website said someone had typed “b”for billions rather than “m” for millions when making a trade on P&G (one blogger noted that it must have been a very fat and strangely shaped finger to miss ‘b’ and hit ‘m’ without touching the ‘n’ inbetween).Others said some financial genius had manipulated the market for his own gain,luring the computer traders to cause the crash so they could profit.Investigations by the Securities and Exchange Commission (SEC) over the next five months found no evidence to support any of these ideas.


Posted February 17, 2012 by avinash2060 in Current Affairs

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