Reply To: Questions regarding DPF.

[Rezwan]

Brian H wrote: The oil rig disaster is almost a pure case of “black swan”; in fact, it may be a red or purple swan. It was apparently caused by a huge surge of gas pressure blowing the valves, sending flammable gas to the surface. It was so large that it is unique in drilling history: there has never been a blowout like it. Safety measures in place saved over 100 of the workers; the ones who died were almost certainly at “ground Zero” in the initial explosion, and probably vaporized by it.

Such events must be treated with care in formulating standards and assigning “blame”. “Hard cases make bad law.”

That’s the point of the black swan. You’ve got a lot of people trying to downplay risks by throwing out the “hard cases” data, (aka “outliers”, “black swans”), and looking at “most probable” events. The “most probable” approach is delusional.

Because you’ll be getting hard cases from time to time. And then, who does absorb the cost of those hard cases? Shouldn’t it be those who have been benefiting most by ignoring or not anticipating the hard case?

Ignoring hard cases hides true risks and costs. Is that rational?

Banking appeared “conservative” for decades, but they were sitting on a huge problem and simply ignoring/hiding the risk. It only takes a year to wipe out all the “profit” they made over the past x decades.

So – the public bails them out, or takes the fall in terms of job loss and houses lost and abusive changes to credit card rates and so forth. That means, effectively, you’ve “blamed” (outsourced costs to) the public.

Meanwhile, all those years, the folks in finance have been giving themselves huge bonuses. They take credit for the booms, but outsource the busts.

They say it’s because they work better on “incentives”. Meanwhile it’s all gambling and they hope we don’t notice. If things go well, their bonuses are huge. If things go less well, their bonuses are a bit smaller. If there are losses, they pretend the losses would have been bigger without them and still get a bonus. Or a golden parachute. If things are catastrophic, they get a bail out. God bless ’em.