We read uber-Risk Manager and author of The Poker Face of Wall Street, Aaron Brown’s post “Sympathy for the Flash Crash” in Minyanville, a business and investment information website, with great enthusiasm. It was fascinating to see a business pundit draw parallels between Toyota Unintended Acceleration and the flash crash of May 6, 2010, in which the Dow dropped about 1,000 points, but recovered almost immediately afterward. It was refreshing to read a financial columnist who actually understands what happened after NHTSA tried to wrest control over an elusive technical problem. He writes:
“…the net result was that the agency ordered the recall of 8 million vehicles and levied the maximum allowed civil fine, then waited for the problem to go away on its own before issuing a study denying there had been a problem in the first place because they looked really hard and couldn’t find one.
When you don’t understand a system, throwing experts at it to announce they can’t understand what happened so it must have been human error, is an unconvincing—but irresistible—tactic.”
While we part company with Mr. Brown over the possibility and advisability of implementing regulation to fix the problem, and a few other details, his viewpoint is worth a read. The good folks at Minyanville kindly gave us permission to re-print it. (The original article can found here on Minyanville.)
Sympathy for the Flash Crash
Reprinted with permission from Minyanville
By Aaron Brown May 04, 2012 9:00 am
The entire modern world has become too complex for anyone to understand, and therefore, too complex for anyone to fix with top-down rulemaking.
MINYANVILLE ORIGINAL When I learned to drive 40 years ago, there were direct mechanical linkages between the car’s controls and its wheels and power train. When I turned the steering wheel, my muscle power (mediated by some levers and gears) changed the direction of the wheels. Accelerator, brakes, heater dial — all affected things through direct physical actions. We make fun of someone who confuses effects with causes by saying he tries to slow down a car by moving the speedometer needle. But in that 1962 model VW bus, pushing down the speedometer needle would, in fact, increase friction on one rear wheel and reduce the speed of the car. The cable was too delicate to provide significant deceleration, but in physical principle it would work.