One possible reason for it being bimodal is that it’s very hard to measure and accurately predict risk, so human-level intuitions and heuristics take over. Humans are notoriously bad at nuance and routinely exclude the middle.
The question in my mind is: why isn’t all of this arbitraged away already? This shouldn’t happen, as the rational money should notice the mis-priced middle, and profit by it. My answer is “politics”. There’s human-level intervention in the form of regulation, bailouts, and tax treatments which remove the ability to profit by providing information. “moral hazard” is another way of describing this—the incentive to act as one believes is removed by such interventions.
One possible reason for it being bimodal is that it’s very hard to measure and accurately predict risk, so human-level intuitions and heuristics take over. Humans are notoriously bad at nuance and routinely exclude the middle.
The question in my mind is: why isn’t all of this arbitraged away already? This shouldn’t happen, as the rational money should notice the mis-priced middle, and profit by it. My answer is “politics”. There’s human-level intervention in the form of regulation, bailouts, and tax treatments which remove the ability to profit by providing information. “moral hazard” is another way of describing this—the incentive to act as one believes is removed by such interventions.