From the trading and investing point of view, could the results have been predicted with a reasonable probability of success to benefit monetarily?

Let us analyze this.

A “Black Swan” has the following characteristics according to Taleb:

1. It is unpredictable
2. It has massive impact
3. Ex-post, explanations are concocted that make the event appear less random and more predictable than it was

No doubt the 9/11 is a “Black Swan.” The financial “Subprime Mortgage” crisis of 2008 and the internet bubble burst in the late 1990s are not “Black Swan”s. Even though Federal Reserve is of the view that they were.  They are “Predictable Surprises”, according to James Montier in his book, “The Little Book of Behavioral Investing.” This sounds like an oxymoron. But it is not.

A predictable surprise has the following characteristics according to Montier:

1. At least some people are aware of the problem
2. The problem gets worse overtime
3. Eventually the problem explodes into a crisis, much to the shock of most

“Brexit” is neither a “Black Swan” nor a “Predictable Surprise.” It is an “Ugly Ducking.” It is closer to a “predictable surprise” however, with the exception of not getting worse overtime, because it is one-shot deal and it is over.

What prevents us from seeing the unpredictable surprise?

Again according to Montier:

1. Over-optimism
2. Illusion to control
3. Self-serving bias
4. Myopia
5. Inattentional blindness

On June 23, 2016, the day before Brexit,  traders and investors alike were over-optimistic because they relied on the polls that favored “remain” to “leave”, 52% to 48%.

Since the risk was quantified, traders and investors alike thought that they were in control, which, as it turned out later was only an illusion.

There was an innate desire to interpret information and act in ways that support our own self-interest. That is to benefit from rising stock prices.

Short-sightedness. People looked only at the polls and did not think about the sentiment of the people who voted.

Traders and investors turned a blind eye to the information that they do not want to see possible. We do not expect to see what we are not looking for.

If only the traders went through this check-list and saw the other possibility that it would be possible for the “Brexit” to actually happen, they could have avoided losses much less benefiting handsomely.

I took the contrarian approach in that I took a risk but with a good risk-to-reward ratio, that made it worth taking it in the first place. Around 2:30 PM on the 23rd June 2016, the day before Brexit, the Russell 2000 index RUT and the S&P 500 index SPX, both were trading flat around 1167.5 and 2104 respectively. The general consensus was that the “Brexit” was not going to happen. Therefore, due to the high volatility and the expectation that the indices were going up, the premiums were very high. Not capitalizing on hope but on the risk-to-reward ratio, I sold 5 RUT contracts of “Bear Call Spread (BCS)”s at the strike prices 1200/1210 for $2.60 a share and another 10 SPX contracts of BCS at the strike prices 2150/2155 for $1.60 a share. The probability of out of the money at expiration for these contracts are 76% and 87% respectively, which are 1.18 and 1.44 standard deviations away from the current price. The expiration dates are July 15, 2016 and June 30, 2016 respectively. The margin of safety are 33 and 46 points for the RUT and SPX respectively which are 2.78% and 2.18% move upward. The return on investment is 29% before commissions in one day. So it is worth a try.

How did it turn out?

After “Brexit” the next day, 24th of June 2016, RUT and SPX plunged down 3.8% and 3.6% respectively. The safety margin widened to 6.17% for the RUT and 5.25% for the SPX with almost zero possibility of coming up in the money and therefore with almost near-100% probability of expiring worthless. Therefore, I get to keep the premium collected with a ROI of 29% in less than a day which is 10585% annualized!

What next? More Ugly Ducklings!

Italeave, Czeck-out, Deportugal, Finnish, Oustria, Spaudios, Deutswiedersehen, French-kiss, Greekgo, Irish-spring, Scotout and even Texit. All these possibilities exist.

The rational investor/trader stands to gain in the midst of irrational exuberance, be it bull or bear.

Get in the Game!