“IT ONLY HAPPENS ONCE IN 100,000 YEARS.”

“IT ONLY HAPPENS ONCE IN 100,000 YEARS.” This article in the Financial Times (again only the first two paragraphs are available at the link) points out the difficulties that trading by computers has encountered in the financial turbulence of the past few weeks. The article describes how one Goldman Sachs fund may have lost 1.5 billion dollars (30% of its value) in the last week. Funds which make investment decisions by computer now account for a large percentage of all securities transactions. Machines are trading with machines. And doing it very successfully or they wouldn’t account for so many trades. Goldman’s Chief Financial Officer called the events of the last few days “25-standard deviation events”, which would make them the kind of thing that occurs once every 100,000 years. It is always tempting for model builders to blame the world rather than the model when the model doesn’t fit the world. A plausible explanation is that the most relevant data base for the events of the last couple weeks would be the handful of financial crises of the last twenty years. That is certainly the data set that a lot of humans are using to discuss the current crisis. Consequently, there is limited data for the computers to crunch.