Impossible Probabilities

The Street reminds us this week of one of the great historical torsions of methodological skepticism:  Although we suspend judgement by thinking in probabilities instead of outcomes, the certainty that "probable" outcomes predominate historically is never interrogated: 

"Consider future market action in terms of probabilities, not outcomes. For example, assume that some causative factor resulted in a specific event (X --> Y) seven out of nine times. The most you can say is that when "X" occurred in the past, it has resulted in "Y" approximately 78% of the time.

But remember, there is a huge difference between historical occurrence and future likelihood. In the example above, this does not necessarily even mean that since "X" has just occurred, there is a 78% that "Y" will happen. Consider: was the first X/Y occurrence really a 100% or zero? Did the second one become 100%, 50%, or 0%, then the 3rd 100%, 66%, 33% or 0%?"

Did an event like the '29 crash follow 7 times out 9 similar historical situations?  Of course not. The temptation is to say that this is because such a situation had never before existed, and that this radical differentiation was a chaotic exception within a larger, well-established inductive order distributed along the economic history of modernity.  Sociologically, it is very interesting to see how this sociological presupposition about the predictability of human behavior collapses so predictably in times of crisis.

Present market data yields a very strong indication (and in a way it yields nothing else) of just such an emergent volatility.  As the best indicator of a psycho-social event in the performative logic of economics, the instability of "predictive comportment" is what we should be paying the most attention to.