Rogue Waves

Finance isn't the only field where faulty, overly simplistic mathematical models wreak havoc. In this week's Economist, an article tells us that "huge, freak waves may not be as rare as once thought". Substitute "market crashes" for "freak waves" and the article could be in the Finance section instead of the Science section of the magazine.

Dr Heller, who likes to sail, says there may be other mechanisms at work too, including an interference effect that causes different ocean swells, travelling at different speeds, to add up to produce a rogue, and a non-linear effect in which a small change in something like wind direction or speed causes a disproportionately large wave.

Sounds like a pretty good description of the global financial markets to me. Thanks to new experiments, it would appear that killer giant waves are between 10 and 100 times more likely to occur than "conventional wave theory" would predict. I am not making this up. I would guess the Bell Curve is featured prominently in this particular wave theory. Nassim Taleb and his black swan non-theory would have a field day with this.