The Electrical Power Crash Is Just Like a Stock Market Crash
Diversification failed when lots of generating plants went down at once.
Electrical grids are designed to survive outages at generating plants, but system designers assume the failures will come one at a time and randomly. This time diversification failed because the record cold snap caused lots of plants to fail all at once. It’s what engineers call a “common mode failure”—the mode in this case being the cold itself.
This is precisely what happens in a stock market crash. Investors who hedge their bets by putting money into assets that are typically uncorrelated or even inversely correlated get swatted when disaster strikes and all the investments behave the same. In market lingo, correlations go to one. A famous case was the 1998 failure of Long-Term Capital Management, a hedge fund advised by Nobel laureates Myron Scholes and Robert Merton.