From: John Conover <john@email.johncon.com>
Subject: Re: FUD in the economy?
Date: Thu, 8 Oct 1998 01:00:10 -0700
John Conover writes:
>
> And what's the chances of it continuing a year, or longer, to at least
> mid 1999? The standard deviation would be 0.01 * sqrt (253), since
> there are 253 days in a calendar year, which is 15.91%. So, three
> sigma would be 47.7%, or from 9300 to 4862 on the DJIA. And what's the
> chances of that happening? We would expect that to happen about once
> every 1 / 0.00135 years = 741 years, or about three fourths of a
> millenia!!! (The last time something like this happened was 1930-it
> MAY have happened in the 1880s-we just don't have accurate metrics to
> verify it-and it may have happened in Holland in the 1600s-ditto-and
> it almost certainly happened in the 4'th century AD in the late Roman
> empire.
>
> Bear in mind that a very small probability of a 1930 happening next
> year does not mean it won't-but the FUD is most certainly not
> justified or rational. Caution is, however-we are 40.56% there.
>
Not that the 40.56% number is impressive, because, if you look at it
from the point of view that we have been in a virtual bear market,
(ie., "correction,") for 3 months, we have to ask the question what is
the chances of it continuing for another 9 months, and dropping the
additional 59.44% so that we have 1930/1931 all over again. Nine
months is about 180 trading days, with a root mean square of marginal
returns of about 1% per day, so the standard deviation of all possible
paths of the indices is 0.01 * sqrt (180) = 13.42%. 59.44% would be
4.43 sigma, or a chance of happening of about about 1 / 0.0000047 =
212766 days, or about once in 840.97 years, (which before the digital
revolution was called about 841 years-you know, when we all new what
counterclockwise meant.)
To put the magnitude of these probabilities in perspective for you, if
you were to take an international airline flight every day of the
212766 days, (just under a quarter of a million days, before the
digital revolution,) you would have twice the chances of falling out
the sky as the current market situation does of continuing to July of
next year. That doesn't mean it absolutely will not continue, (nor
does it mean you won't fall out of the sky on your annual vacation,
either.) But it gives you a relative comparison of the risks.
So, why the word "Caution"? Idiot resistance, (not idiot proof-there
are some very resourceful idiots,) and an idiot could interpret such
low probabilities of disaster as a virtually guaranteed certainty that
disaster was virtually impossible, and justify to their self that
dumping their life savings into the-latest-and-greatest-Internet-stock
was a reasonable strategy, based on scientific evidence. Not that it
isn't, mind you.
John
--
John Conover, john@email.johncon.com, http://www.johncon.com/