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more-on-low-frequency-high-impact-events

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Adam's post yesterday on the agency problem got me thinking more about low-frequency, high-impact events and their predictability. His post was about Bear Stearns and how employees lost money. The interesting point for me was that those are the people that should have been in the best position to know that the potential for a high-impact event was increasing.

Reflecting now on the last two bubbles (tech and real estate), I was thinking about how hard it is to recognize such things from the inside and that even if you do, the lack of liquidity may hurt you. For the tech market, this was true for angel investors, VC and entrepreneurs (not so much for public company shareholders). For real estate, obviously, it is hard to sell a house quickly. Hedging these bets is very tough too. You could short tech or housing stocks, but that is a sophisticated and potentially risky tact to take.

Here's an example of risky behavior that is low-frequency but extremely high-impact:

She is one of a cadre of 58 school crossing guards in Cobb County who face traffic everyday. That means inattentive drivers, speeders and trucks lumbering by as she stands in the middle of the street. No one's been injured recently, but three have been killed on the job since the 1970s, said Cobb County police Lt. Al Campbell, who oversees the crossing guards.
Well, low-frequency for the drivers - not so from the crossing guards' viewpoint.

"There's a growing disrespect for them," Campbell said. "People are not heeding to their authority. People are speeding through."

Adding to the hazards of the job, more parents are driving their children to school rather than putting them on the bus. That leads to traffic jams in front of the schools, which leads to frustrated drivers who want to race by.

Wells will take down tag numbers and turn them over to Campbell if she needs to.

To me, this reads like a warning that a low-frequency, high impact event is about to occur.

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