Wednesday, December 17, 2008

The Black Swan

Question: What do these events have in common? Bush - 2000 - Florida, 9/11, JFK Assassination, the internet, 1929, 1987 & 2008 market crashes, rogue waves and the 50 Billion Dollar Ponzi Scheme

Answer: They're Black Swans /highly improbable events that carry great impact.

"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."


and

"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."

To followers of quantum, chaos and Murphy's Law, this book relates because no intelligent person accepts the fact that reality can be predicted. (Except for self proclaimed experts such as economists, financial advisers, governments and corporations etc., etc. who refuse to accept this irrefutable fact.).

The law of initial conditions rules and aggregates of initial conditions which makes up reality means that making educated guesses about anything is a crap shoot at best. See James Gleick as reference point. "Guess what caused the expensive crash of the Ariane 5 in 1996. And what does it say about software design?"

The most original part of the book is Nassim's take on history being a vehicle that "looks forward" as history, as everything else, will  always be a set of incomplete initial conditions that attempts to describe why a particular event happened as it did. What even more damming is the fact History is written by the winners.

And yes Virginia, there is a black swan. :)

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