Claiming that correlated market crises are statistically impossible is plainly false

Evidence

What these sigmas refer to is the number of standard deviations from the mean of a probability distribution at which an outcome will, probabilistically speaking, occur, with each higher sigma (number) being increasingly less likely than the last. According to Mr. Viniar, what happened in 2008 was “comparable to winning the lottery 21 or 22 times in a row.” LTCM’s ten sigma in 1998 was, likewise, an event that should have occurred roughly three times in the life of the universe. That these two events happened a mere nine years apart shows us that such claims are nonsense. It also tells us why Nassim Taleb has a huge problem with the idea of risk management and financial engineering. — Mark Blyth, Austerity, 104

Categorization

• DEFINE: Clarifies what sigma claims actually mean statistically — a ten-sigma event should occur roughly three times in the lifetime of the universe.
• CANDY: The ‘lottery 21 or 22 times in a row’ / ‘three times in the life of the universe’ framing is a punchy, tweetable statistic.
• XREF: Connects to Taleb’s black swan thesis and the general critique of Gaussian risk models, which complements Mattei-era critiques of financialized austerity. — connects to: Efficient market theory could not imagine internally-generated systemic crisis — Mark Blyth, Austerity: The History of a Dangerous…, 130; Correlation assumptions in CDO design collapsed when housing markets proved linked. — Mark Blyth, Austerity: The History of a Dangerous…, 91; The financial system failed to foresee crisis because its risk theory denied catastrophes — Mark Blyth, Austerity: The History of a Dangerous…, 100 (+3 more)