Externality
An externality is a cost or benefit imposed on a third party that is not priced in the original transaction — fire sales, contagion, and pollution are the same object in different clothes.
Definition
Externality refers to fire sales, contagion, and pollution are the same object in different clothes. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It is a named object desks use to frame risk, positioning, or process. When fire sales, contagion, and pollution are the same object in different clothes shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what externality is saying. If fire sales, contagion, and pollution are the same object in different clothes moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Keep the definition fixed, then challenge it with cross-checks before sizing. Prefer a short written null hypothesis for Externality: what would falsify the current reading in the next window?