“Many economists will tell you that the chances of something really big and bad happening are really, really small,” Stanley says. But when viewed through a different lens, he contends, catastrophic events — such as Lehman filing for bankruptcy in 2008 — aren’t exceptional but inevitable.
At the time of Lehman’s collapse, Stanley had been exploring the notion that extreme economic events, the bubbles and crashes of financial markets, might be described by a mathematical law — a tidy law, like acceleration due to gravity. And he isn’t the only outsider who has had an eye on the markets. Scientists from a range of fields have been poring over financial data, finding some curious patterns in the process.
These patterns suggest that standard economic models based on the notion of equilibrium — markets will fluctuate but then settle down like the surface of a still pond — may not capture the whole story. Freak events may be a normal part of long-term economic behavior. If that’s true, then the mathematical methods guiding Wall Street’s estimation of risk are seriously flawed, offering a dangerous false sense of security.