Explosions In The Sky

Dear reader, During World War II, the RAF Bomber Command recommended that additional armour plating be added to the most heavily damaged areas of aircraft returning from raids. This recommendation was rejected by mathematicians working in the newly formed Operational Research division: instead, they argued, armour plating should be added to all the undamaged areas of aircraft.

The reasoning was that if the bombers had been hit in the damaged areas, and yet had managed to return to base, those areas must not be critical. Instead, they added armour plating to all the undamaged areas: those were the areas that were critical. The planes that were hit in those vital areas had never made it back to base to be observed at all.

Today, volatility in the financial markets is at rock bottom, despite the reality of the volatile world we live in. Why? Even Nobel-Prize winning economist Richard Thaler is puzzled:

There are numerous behavioural reasons why this might be true. For starters, people have a tendency to believe that the way things are today, will be the way things are tomorrow. In particular, it is difficult to imagine massive disruptive events, that are by their very nature, events that have never happened in quite that way before.

Furthermore, we all suffer from hindsight bias. Just as with startups, we only get to see the ones who performed well enough to stick around: everyone else has gone out of business.

At the end of the day, it is the victors who write the history books.

Yours Sincerely,
Henry Chong