[RigelKentaurus]

Extremely interesting! We have still so much to learn.

This seems to be an example of Extremeistan as described by Taleb. Can this specific research be extended to any other domains, e.g. finance? Most financial software uses known worst case scenarios while doing retirement planning, such as a 30% drop in equities. What if the worst case is a lot worse than 30%? Asking for experts to weigh in.

[tsimionescu]

What they've done here is a specific model of a specific physical phenomenon, that predicts higher extremes than the previous models predicted (and better agrees with certain observations that contradicted the previous models). Specifically, they are modeling certain aspects of how waves that oscillate both along and across the main direction of motion behave.

You can't apply this research itself to finance, because it's about the movement of water, not money. You might be able to take inspiration from some of the math, or take heed that even well established models can turn out to be wrong in significant ways.

[pas]

> Most financial software uses known worst case scenarios while doing retirement planning, such as a 30% drop in equities.

... yes, and of course in retrospect of 2008, COVID, land war in Europe, "totally not a war in the Middle East" ... who knows what's the right "worst case" scenario.

But. But. There are clear difference between business as usual and blatant charlatanism masquerading as BAU. (See the snippet below, highlighting the bad deals between 2006 and 2008.[1])

And rating agencies just issued AAA or whatever. This of course points to problems with the industry not with science. (See also the linked reddit thread.[2])

"""

D. Fallen Angels

Next we examine structured finance securities that suffered the most severe downgrades. From 1983 to 2008, 11% of the tranches were eventually downgraded 8 or more notches (fallen angels). Table 7 decomposes these fallen angel tranches by their original credit rating. Tranches rated below Ba3 cannot fall more than 8 notches by definition (the lowest rating, C, is precisely 8 notches below Ba3). Surprisingly, we find that most fallen angels were originally rated AAA (19%). Tranches originally rated Baa2 or A2 make up the next largest portions of fallen angels at 12% and 10%, respectively. Clearly, some of this is supply driven (every CDO has a AAA tranche, but not every CDO has a Aa1 tranche). Table 7 also shows that nearly all of the fallen angel tranches (86%) were issued between 2006 and 2008, underlining the poor quality of recent deals.

"""

[1] https://www.journals.uchicago.edu/doi/full/10.1086/648293

[2] https://www.reddit.com/r/AskEconomics/comments/13812y2/what_...