While the centuries of evolution
might have optimized the human-brain to quickly catch a tiger (or a snake) within a mass of bushes.
It is evident at this point that nothing has prepared us to accurately intuit at numerical extremes.
Consider these 2 events,
- Event A - 99% unlikely to occur.
- Event B - 99.9% unlikely to occur.
It is not immediately evident that
one of the events is 10x more likely to occur than the other.
After Friday’s market close in the US,
Moody’s announced that it had downgraded the U.S. credit rating from AAA to AA1
[Source]
Meanwhile, retail investor speculator…
AAA
- The best grade
AA1
- A lower grade.
- AA1 belongs to AA grade. The "1" denotes the best within the grade.
Source: Bond Rating AA+ vs. Aa1: What's the Difference?
One way to understand what this credit-rating downgrade means in numerical terms,
is to look at actual incidences of defaults over the years, grouped by credit-rating.
AA rated bonds have defaulted ~25% more often (1.4%) than a AAA rated bond (1.1%).
Data from Standard & Poor’s 2022 U.S. Corporate Default Study, as of 6/13/2023.
The 15-year cumulative average default rate is calculated by weight-averaging the marginal default rates in all static pools.
Source: schwab.com/learn/story/what-happens-when-corporate-defaults-rise