On the way back from the Canadian Rockies we ran into the snowstorm of the century coming over the pass into Seattle. I noticed the difficulty people have in changing their mental models to fit a new situation. Despite icy roads, deep in snow, and blowing wind, many retained the old drive 70 in any conditions model of motoring. Soon we saw cars spinning out into the deep snow.

Traders also run into trouble when conditions change and there is a fat tail event. They keep the same low vol model in their heads and get into trouble. The same problem exists for fixed algos when conditions change and they use the same model.

The problem is when a new situation arises that has never occurred before. It happens quite often. It just did recently. Models built on experience may be deficient. It's clear one has to retain some sort of flexibility.


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