Probabilistic Prohibition

I am no probability expert (while I did gain a graduate degree where the Statistics department played a key role I haven´t really worked on probability-related issues ever since), but it seems to me that the assumption of Normality when it comes to the financial markets shows strong correlation with that other famously misguided imposition, namely Prohibition in America´s 1920s.

Just like Prohibition forbade regular folks from (legally) drowning down their sorrows, Normality “forbids” investors from taking the markets beyond certain levels. Such probabilistic assumption denies individuals the capacity to cross certain lines, explore certain territories, discover certain realities. It is, thus, a very constraining assumption. A tyrannical one, you might say. Just like with any form of reactionary totalitarianism, individuals are judged to be of limited capabilities, requiring pre-set centrally-imposed stringent regulations. They are assumed to be unable to reach beyond certain limits, forever confined to a restricted existence.

In sum, a financial theory world ruled by Normality is a world where humans (the only ones that can move a market) are prohibited from realizing their full potential, where they are caged in a dull universe of severely reduced possibilities, where freedom is only a word. Perhaps Prohibition isn´t the only historical parallel with the Normality assumption after all. Do I hear .....ism?.

To all those eager to break free from the Normality dictatorship, history may provide a comforting message. Prohibition and ......ism eventually did, of course, spectacularly fail. Why? Simply put, because they run dramatically counter to human nature. People (generally) want to drink. People (usually) want to be free. If one tries to set artificial limits on humans natural desires, ambitions, and capabilities, the eventual end result is bound to be one of failure.

Real-life markets show us with astounding regularity that investors (who, despite occasional evidence to the contrary, are all to human) also want to be free. They want to spread their wings and be able to explore any possible price level, no matter how remote, no matter how inaccesible, no matter how unthinkable. They want to realize their full potential, and invariably do so.

The theoretical straightjacket imposed by Normality seems as much at odds with humanity as were Prohibition and .....ism. Inhumanely unrealistic. Inhumanely unworkable. And yet, all too tempting for certain freedom-denying technocrats.

ptriana@profesor.ie.edu