Black Swan?

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pir8don's picture
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Joined: Sep 30 2008
Posts: 456
Black Swan?

I've nearly finish Nassim Nicholas Taleb's The Black Swan and wonder what others think about this book. I found I could only read a few pages at a time then had to think about them before reading on.

If population is the driving problem then is it tunnelling to break it down into Environment, Economy and Energy as Chris does?

Taleb has observed very specific weaknesses in the american economy and mentions JP Morgan and the Fannie May. Given that black swans are by their very nature unpredictable how do these observations fit?

If economic collapse was predictable then it isn't a black swan event. But both Taleb and Mandelbot appear to believe that it is a black swan event. Anyone able to reconcile the two?

Given Chris's earlier writings identifying apparent limits to financial growth that make the unfolding crisis inevitable. That seems to count against it being a black swan.



DavidLachman's picture
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Posts: 153
Re: Black Swan?

Hi Don,

I read that book a few months ago. I have a little bit of background in statistics so I could read a few more pages at a time than you. It seems that the term "black swan" has taken on a life of its own that is different that the exact meaning in the book. Truely Black Swans are unpredictable events with a large impact that are only explanable looking backward. Obvious to anyone who reads this site, then, for you, the economic collapse is not a black swan event in general. How it actually happens may be (inflation, deflation, bank holiday, confiscation, who knows, and who knows when). Because we are predicting these things we can prepare for them, but for the mainstream, I suspect these will appear as Black Swans, no one is expecting these (heck, we've already reached the bottom....). It may be a matter of opinion then, what a black swan is for any particular person (I personally don't like that way of defining it). However, for the readers of this site, what are the black swans to watch out for? This question is the one I want answers to, but it is exactly the questions that Taleb's book tells us we can't answer. The Black Swan is the unknown unknowable. That is the real meat of what he is saying. His solution is to find areas of high return for risk and areas of almost zero risk and divide his risk tolerance between the two. There is no point in intermediate positions. For him, it means find lots of venture capital companies to put the risk money into, because it is likely that one of them will win big in extremistan and you want that exposure, even though most of them will lose all your money. For the money you don't want to risk, keep it out of situations that have any risk (this used to be T-Bills, maybe today it is gold as the risks have changed this year). I don't think he was thinking about Black Swans in terms of total economic transistion (collapse) but I think they are useful in reminding us that we don't know, if gold will be a winner, or gold mines, or silver, if cash will be the thing to have, or farm land, or some energy company or putting money into goods for barter, we don't know what the black swan will be so we don't know for sure what to do. After it happens and we see it has a huge effect and we can see how it came about, then we will know and know it was a Black Swan. The other thing he says, besides making sure you are exposed to positive black swans, is that black swans are actually common, they just seem unusual. Keep on your toes. Try to hedge as much as possible.


tom.'s picture
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Joined: Aug 18 2008
Posts: 345
Re: Black Swan?

From Nicholas Taleb


Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks - when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ....I shiver at the thought.

Banks hire dull people and train them to be even more dull. If they look conservative, it's only because their loans go bust on rare, very rare occasions. But (...)bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events "unlikely".

There is no way to gauge the effectiveness of their lending activity by observing it over a day, a week, a month, or . . . even a century!

(...) the real- estate collapse of the early 1990s in which the now defunct savings and loan industry required a taxpayer-funded bailout of more than half a trillion dollars. The Federal Reserve bank protected them at our expense: when "conservative" bankers make profits, they get the benefits; when they are hurt, we pay the costs.

Once again, recall the story of banks hiding explosive risks in their portfolios. It is not a good idea to trust corporations with matters such as rare events because the performance of these executives is not observable on a short-term basis, and they will game the system by showing good performance so they can get their yearly bonus. The Achilles' heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.

As if we did not have enough problems, banks are now more vulnerable to the Black Swan and the ludic fallacy than ever before with "scientists" among their staff taking care of exposures. The giant firm J. P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people's risks, causing the generalized use of the ludic fallacy, and bringing Dr. Johns into power in place of the skeptical Fat Tonys. (A related method called "Value-at-Risk," which relies on the quantitative measurement of risk, has been spreading.)

Please, don't drive a school bus blindfolded.

Owing to [...] misunderstanding of the causal chains between policy and actions, we can easily trigger Black Swans thanks to aggressive ignorance-like a child playing with a chemistry kit.

mred's picture
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Joined: Apr 8 2008
Posts: 96
Re: Black Swan?

No black swan. If an insurer sells protection against some natural catastrophe of the usual varieties: flood, tornado, etc. but then it is a meteor that strikes in the living room, then, that is really a statistical freak, your black swan. But when people sell insurance (derivatives) against risks that are created by the action of other men, other players in the game, then the risks will not be captured by statistics and bell shaped curves even with fat tails! This is because human action includes will, human action is not just sampled uniformly (or with some arbitrary distribution) from a set of pre-defined alternatives. When LTCM collapsed, the "geniuses" estimated the risks of the markets moving against them as a virtual impossibility. But when things started happening and the other players in this huge casino made their moves, aware of the types of positions that LTCM had, they acted exactly and willfully against LTCM. So the virtual impossibility from the statistical perspective became virtual inevitability from the common sense perspective. The statistical perspective applied to things like the derivatives markets makes ultimately as much sense as applying it to a game of chess. My point is: it is quite different to apply statistical techniques to risks created by nature than to risks created by men.

As it was pointed out, the seeds of the crisis were sown a long time ago. With the expulsion of gold from the monetary system, the ensuing instability in the interest rate structure which justified bond speculation, together with the virtually unlimited expansion of fiat money to feed bubble activities, we have our perfect storm that could simply not have ended in any other way.

The statistical view applied to markets is the ultimate "tunnel vision" exercise. It basically takes for granted all the poisonous premises of the monetary system, and doesn't question one single thing. Of course it must be caught with its pants down.

Indeed population is the problem, but to focus only on that is actually more limiting than the "three E's" that Chris presents. We have problems with the monetary system, lack of genuine free markets, diminishing freedom, lack of education, lack of information, even lack of democracy, but one has to start somewhere.


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