Category: Think Tank

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One Response to “Rare Shocks, Great Recessions”

  1. Mattw says:

    The authors are trying to address the issue of fat tails. The authors substitute the Student’s T distribution for the Normal distribution to get a better fit of fat tails.

    How small shocks cause great things:

    Tarek al-Tayeb Mohamed Bouazizوi was a Tunisian street vendor who set himself on fire on 17 December 2010, in protest of the confiscation of his wares and the harassment and humiliation that he reported was inflicted on him by a municipal official and her aides. His act became a catalyst for the Tunisian Revolution and the wider Arab Spring, inciting demonstrations and riots throughout Tunisia in protest of social and political issues in the country. The public’s anger and violence intensified following Bouazizi’s death, leading then-President Zine El Abidine Ben Ali to step down on 14 January 2011, after 23 years in power.

    So you don’t really need a rare shock to cause something great. A small shock will do because the foundation for a major crisis was already laid. That’s because society moves forward in time with a positive feedback loop that has something like a power-law distribution of crashes – a fat-tail distribution. This is how a forest works too. And suppressing small collapses just means a bigger one is coming because of that feedback stuff. Dictators that suppress all dissent get a revolution as the ultimate crash. Economies that heavily focus on stability get a Great Depression as the ultimate crash.

    Perhaps the authors of this study should have looked at a power-law distribution.