Blair and the Black Swan

Tony Blair has been suffering some setbacks lately. Apparently he got the message that I shorted the "Blair Resigns by end of Dec 05" contract trying to make a few cents here and there. Not that he is going anywhere before the end of the year, but it can make for some nervous news reading. The vote on the numbers of days the government can detain terrorist suspects started things off. The EU budget negotiations may also have a negative effect since he is perceived to have given up too much -- the British refund -- and not received strong commitments on behalf of the French to cut their agriculture subsidies. This highlights some important issues in trading. It is not difficult to bet on things that are likely to happen -- Blair not resigning before the end of the year -- and win. However, traders exposes themselves to big losses in the event of a "Black Swan" event, a very rare very bad outcome. You might expect the accumulated winnings on all the trades on "likely" events to compensate for the rare negative outcome and they well may. The problem is that it is very difficult to know the distribution of these "Black Swan" events. This is especially difficult for political/event contracts. The good news -- the downside is limited in these binary event contracts. You at least know the worst case.