Deliberately assuming wild randomness can paradoxically keep markets mild

Evidence

In both 1987 and 1998, practical action involving models that incorporated the assumption that randomness is “mild” may thus have helped to generate “wild” randomness. The adoption by the Options Clearing Corporation of Mandelbrot’s wildly random infinite-variance Levy distributions can also be seen as counterperformative, although in this case deliberately so. By assuming wild randomness, the Options Clearing Corporation hopes to keep randomness mild. — Donald MacKenzie, An Engine, Not a Camera, 1169

Categorization

• XREF: Echoes the earlier chapter on Mandelbrot and the Options Clearing Corporation’s adoption of Levy distributions; also connects to the reader’s interest in how market conventions are self-fulfilling. — connects to: Stock price changes are modeled with thin-tailed lognormal distributions, not fat-tailed ones — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 138; Empirical aggregation tests undercut the Levy distribution’s self-similarity claim — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 507; Assuming wild randomness is intended to reduce the likelihood of its disasters — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 939 (+3 more)
• CANDY: The inverted logic — assume catastrophe to avoid catastrophe — is a punchy fact about how the OCC prices options.

Broader Connections

• Partial randomization can turn a conflict-addled game into a profitable equilibrium #corroborates (0.85) — Thomas C. Schelling, The Strategy of Conflict, 747