Haunted By Statistics
As we've wandered down the echoing corridors of behavioural finance we seem to be haunted by a troublesome spectre, which refuses to go away no matter how much we prove to it that it’s a figment of economists’ imaginations. Discovered by Francis Galton, appropriated by Harry Markowitz and embedded in risk management models ever since, our ghoulish apparition is a mathematical construct, the Gaussian distribution, aka the bell curve.
The Gaussian distribution keeps on reappearing throughout economic theories as a rule-of-thumb description of how markets behave. With which there is just the smallest problem – markets don’t behave as it would predict. We’ve known this for over forty years, ever since Benoît Mandelbrot showed that cotton prices bound around in a decidedly peculiar way. Markets behave madly far more often than the standard models predict so why anyone should be surprised that they fail catastrophically every so often is a bit of a mystery, really.
As we've wandered down the echoing corridors of behavioural finance we seem to be haunted by a troublesome spectre, which refuses to go away no matter how much we prove to it that it’s a figment of economists’ imaginations. Discovered by Francis Galton, appropriated by Harry Markowitz and embedded in risk management models ever since, our ghoulish apparition is a mathematical construct, the Gaussian distribution, aka the bell curve.
The Gaussian distribution keeps on reappearing throughout economic theories as a rule-of-thumb description of how markets behave. With which there is just the smallest problem – markets don’t behave as it would predict. We’ve known this for over forty years, ever since Benoît Mandelbrot showed that cotton prices bound around in a decidedly peculiar way. Markets behave madly far more often than the standard models predict so why anyone should be surprised that they fail catastrophically every so often is a bit of a mystery, really.
