MARK BARNES: Give credit where it is due, and ignore the law of averages
Financial risk analysis should focus on the law of averages, if the population follows a normal distribution — but ours doesn’t
Averages can hide a multitude of sins, or, if you’re of the glass-half-full mindset, a multitude of opportunities. SA has a serious shortage of valid averages. A lot of financial risk analysis is focused on the behaviour of the average — on the crowd that fills the middle of the bell curve. Intentionally, or unwittingly, risk is most often priced off the average behaviour of the exposure.
This is how it should be, if the population follows a normal distribution — but ours doesn’t...