Comments

I wouldn't argue with the impact of the highly improbable and our inability to see it coming. Yes, The Black Swan is a sublime, eye-opening book about how easily we are blind-sided by the low frequency occurence. But, I would argue that if you are going to wrap up large numbers of potentially bad debts in the notoriously dangerous sub-prime mortgage market and present them as some kind of aggregated financial instrument, as the hedge funds were doing, then it's not exactly a Black Swan moment when the whole edifice comes crashing down as the fixed term low interests give way to higher variable interests and swathes of low-income people who have been mis-sold mortgages find they can't pay them back. It's more of a Homer Simpson "D'Oh" moment of complete predictability than a "Where did that come from?" moment. And, with a bit of luck, the financial ripples will die out as they originate with what was (and is only now being recognized as) the lunatic fringe of the risk market. I think this is more of an Emperor's New Clothes than a Black Swan moment.

Posted by Phil Dourado at August 13, 2007 1:31 PM

I agree with Paul about whether this is a Black Swan moment. It's more like chickens coming home to roost.

Posted by Wally Bock at August 13, 2007 2:43 PM

I read this book, and while some of it is way over my number-deficient brain, large portions are completely fascinating.

I would suppose that to a person like myself, who blindly invests her 401K into the market because "that is what one is supposed to do" (yes, I read the part of the book about that. It's on my list to call Fidelity), then it is a Black Swan moment. And I deserve to be shocked for not taking the time to understand it all. For those who actually understand the intricacies of the markets, the Black Swan is probably a Grey Swan.

Posted by Gayle at August 13, 2007 3:09 PM

Great post, thanks. I read and enjoyed Fooled By Randomness, I need to get The Black Swan.
http://amateureconblog.blogspot.com/2007/05/quick-book-review-fooled-by-randomness.html

Posted by Chris Meisenzahl at August 13, 2007 7:28 PM

Wow - great post. Will have to go get that book.

So, Tom - how do we walk the tightrope - on one side there's frozen decisional constipation over potential black swans swarming on the horizon and on the other there's the pattern matching abilities of our human brains that make us so good at so many things (like multitasking).

Is this just more 'who stole my cheese' - invest yourself in a process which keeps you ready for anything (and looking for it), or is this something more?

Posted by Duncan at August 13, 2007 7:55 PM

I'm currently reading 'The Black Swan' whilst on holiday in India. Since I am here, I cannot help discussing some of the key ideas raised in the books with some of my indian friends and it ends up being a discussion on causality, the meaning of life and whether we can really ever know anything. The bit that is really fascinating to me for the moment is how our mind tries to create 'causal' models of everything we see and give meaning to random events and how it is almost impossible to go through the day without doing this. Indians have become masters of doing this with astrology, where for instance my father in law was just told that according to his star sign he will now go through seven and a half years of bad luck. This means that anything bad that happens now will be seen through this lense. Even though we both know this is irrational it will be hard to resist the temptation to make these events fit 'staturns influence'. I'm also revisiting Hume (from my Oxford philosophy days) and trying to recollect how to become an empiricist and being honest about the fact that causality is just an illusion. Fun stuff - but which could lead lead (causal?) to some strange metaphysical conclusions... Anyway back to my book.

Phil

Posted by Philip Weiss at August 14, 2007 12:09 AM

That's a great question from Duncan. Tom always talks about looking for freaks and having lunch with them as a metaphor (actually, he means it literally, too) for keeping yourself from slipping into grooves or tramlines based on what made you successful previously and that appear linear but actually will probably bang you straight into a brick wall at some stage, because life is made up of squiggly lines, not straight ones, as Henry Mintzberg once said.

Gary Hamel says you can see some Black Swans coming (though he doesn't put it like that). You just need to look to the edges of things. The fringe eventually becomes mainstream. A lot of the future is already here, under the surface of the now, waiting to emerge, and you can see it coming at the edges.

Nokia sent its drab Finnish engineers out to the edge - to Tokyo nightclubs, Venice Beach, the street culture of London's King's Road - and told them to live there for six months, see how these 'fringe' cool people live, then come back and invent phones they would want to buy.

That's how Nokia went from a maker of gumboots and toilet roll holders to dominate the cell phone handset market. So, cultivating peripheral vision helps challenge the pattern-forming in our brains that keeps us in a 'same old' groove. It can help you spot a Black Swan on the horizon.

Sam Walton put it brilliantly, too. He said if you see everyone going in the same direction, turn around and head the other way. In other words, be the unpredictable Black Swan yourself. It's the herd mentality that breeds the kind of stock market mini-crisis we have at the moment.

Tom also ofte quotes Wide Angled Lens (if I've got that corrrect) in which Wayne Burkan (if I've got that correct, too) says pay attention to your extreme, oddball customers asking for things that no-one else is asking for. They may be Black Swans in disguise, telling you what is coming next, rather than just demanding and unreasonable (and therefore ignored).

Posted by Phil Dourado at August 14, 2007 7:18 AM

"But, I would argue that if you are going to wrap up large numbers of potentially bad debts in the notoriously dangerous sub-prime mortgage market and present them as some kind of aggregated financial instrument, as the hedge funds were doing, then it's not exactly a Black Swan moment ..."

Phil, I would argue the opposite side. Though it looks obvious in retrospect (most things do), I find it hard to call all those hedgies idiots--which you effectively do. I disagree/disagreed with them, but everybody including Greenspan (increasingly discredited and no longer a "genius") allowed the thing to spiral ourt of control on the de facto (de facto!) assumption that "it" could effectively go on "forever" (the madness, rather than wisdom, of crowds, including very IQ-smart crowds). And than a (the) unpredictably "predictable" Black Swan camee along. Black Swans are in a way predictable as in, "Someday there's going to be a Black Swan"--eg another major terrorist attack. But, as with terrorism in the Homeland, we are collectively and individually understating generic risk.

Posted by tom peters at August 14, 2007 7:47 AM

"The bit that is really fascinating to me for the moment is how our mind tries to create 'causal' models of everything we see and give meaning to random events and how it is almost impossible to go through the day without doing this."

Philip, AMEN!!!!! (And of the utmost importance from 10 Downing Street and 1600 Pennsylvania Avenue to the streets where you and I live.)

Posted by tom peters at August 14, 2007 7:50 AM

What a strange day... After posting this note on the forum, I went out for a haircut on the wet (monsoon) roads of Mumbai. I decided to stop at a bookshop on the way back to buy a book by Kishore Byani called 'It happened in India' - an apparently great book (was recommended by someone who works for him) on how a new entrepreneurial culture is emerging in India (Tom if you haven't read it, I think you should check it out). In the book shop, at the entrance I find another book by Nassim Nicholas Taleb called 'Fooled By Randomness' - with the description ' one of the smartest books of all time' by Fortune (is that really possible?). Anyway I decided to pick it up (I need to start watching my excess luggage as I have a pile of approx 20 box to bring with me back home) and at the counter, the guy standing next to me (looking every bit the part of the new indian entrepreneur) says 'Where did you get that?' So I told him that I had been enjoying the Black Swan and had been drawn to read more by the author - so he went around the shop looking for the book. Upon returning from my expedition and reading a few more pages in the book, I found my post has already been read (thanks Tom - great to see that you check through your comments and take time in replying to them). I invited my indian friend to check out your blog as I said you had been posting on the Black Swan. So there you go, globalisation, networking and India all converging - again.

But just to throw a thought provoking idea in this whole 'causality business' as I also just finished another (and altogether simpler) book: The Alchemist by Paulo Coelho. In that book causality is defined in - at first sight - the exact opposite way that Nassim does: you need to read the 'omens' to follow your destiny - the world will show you the signs (about what you need to do to follow your destiny). Now in world without meaning is it better to invent a new meaning based on these random signs - maybe to quench our first for causality, to admit that there is meaning and that we are just wasting our time if we invent this, or to follow the apparently random one thrown in by apparently rather complicated divine powers. I don't believe in omens in business, but I think it does add colour to your life from time to time to follow these random signs ('it was meant to be' sort of stuff). What do you think Tom? Should we be ultra rational empiricists? Can we let in some random omens and let them lead our lives down unexpected paths - doesn't the business world and our lives need a bit more spirituality (and I'm saying that from the perspective a hard core agnostic/atheist if I had to make a decision)?

Phil

Posted by Philip Weiss at August 14, 2007 8:17 AM

Warren Buffett warned years ago, when hedge funds first started playing around with derivatives, that the financial instruments the folks with big IQs were creating were drifting so far away from reality that they were a danger to the stability of the market and to confidence in the market. So, that's at least one person who pointed to where this particular Black Swan would be coming from with some degree of accuracy in advance, rather than in retrospect. I would not call the mathematical geniuses who concoct these financial instruments idiots, as that breaches the 'no abuse' rule in your comment-posting guidelines, Tom. But, I'd say a lot of the big IQ hedge fund people are a new form of idiots savants - very bright, but playing with matches and not bothered by the consequences. Let's hope it's only their own house they've left charred by the sub-prime experiment.

Posted by Phil Dourado at August 14, 2007 9:24 AM

"idiots savants"

yes

Posted by tom peters at August 14, 2007 9:50 AM

Taleb has totally sold me. Swan opportunity now may be 2nd-3rd home buying in a buyers' market. Free enterprise investment genius shall always skim amazing wealth - the rest of us though can play it fast & furious. Internet savvy savants can be wealthy too - proact in real time as markets swing.

Posted by John at August 14, 2007 10:10 AM

Giuliani will never be president.

Posted by jpk at August 14, 2007 7:33 PM

I love both of Taleb's books. It describes precisely why my career has gone as it has. It has built not on knowing enough to have a box that I squeeze everyone into, but rather the tools that help me discover what I don't know. That is the most important lesson that leaders should learn from Taleb. What they don't know is more important than what they do know. And I suggest that they don't even really know what they think they know. When I admit that I don't know, it opens up a much wider range of possibilities than my preconceived notions promote. The art of practicing Taleb's wisdom is still the challenge, and for me it is starting the day looking to discover what I don't know.

Posted by Ed Brenegar at August 14, 2007 8:04 PM

Thanks Phil

By the way - Australian swans are black - I hadn't seen a white swan until I was in my twentys.

http://en.wikipedia.org/wiki/Black_swan

Actually there is a point to this - frame of reference is pretty important in looking for (and thinking about) 'Black Swans'.

Posted by Duncan at August 15, 2007 4:39 AM

There is another recent Black Swan event - the collapse of the 35W bridge in Minneapolis. I'm both trained as a statistician and a civil engineer, so I've been trying to follow this one with interest. To a certain extent, a major bridge collapse has been predicted for years - there has been lots of warning about our lack of funding for maintaining existing infrastructure. Congressman get kudos for bringing in the bacon for NEW projects, not maintaining existing infrastructure.

So, the 35W was forseeable - but certainly there was no way to predict it would be that bridge at that time. Inspections had been done on the bridge, and the claim made that it could make it for a number of more years of service. Probably, on the average it would have. But, with so many bridges in such condition, the odds add up, and we end up with a Black Swan event. And yes, there will be all sorts of rationalization about that specific event, and likely we will go on ignoring the maintenance needs of our infrastructure until such events become more common.

From a Black Swan perspective, there does appear already to be several issues that weren't questioned until now - such as the design being susceptible to single point failure, and perhaps issues with loading of construction equipment on it.

Posted by Steve Prevette at August 15, 2007 12:45 PM

For me, the biggest lightbulb moment of the book is how you can't see the obvious until it comes. And then you smack your head, "Of course!"

Take 9/11. For as much as it pains me, caused/continues to cause so much pain for my country (read the NYC papers daily to see), I just have to admit that those awful men really figured out a solid plan. Nobody - be honest with yourself - nobody saw that particular method of destruction coming. Cars are rolling bombs we drive every day. What a short jump to think of an aircraft. Of course!

This book has really changed how I see.

Posted by Gayle at August 16, 2007 6:46 AM

9/11 was a symptom of the divergence between western and eastern cultures just as the current stock market crash is symptom of a divergence between real and imaginary values. The response to both is a revaluation of fundamentals. Don't regard every passsing car as a bomb but try to bridge the gap between where we are now and where we want to be. Islamic fundamentalism won't be defeated militarily, it has to be defeated by providing better alternatives. After all, communism wasn't defeated by military might - it was defeated by popular aspiration. The issue at the moment is that America doesn't understand how unattractive its brand of culture appears to be.
I agree with Phil D about Emporors new clothes and that the long term trend won't be chacterised by this black swan moment but by the long term underlying 'truths' of economic reality rather than the imaginary world of derivatives.

Posted by Matt Birchall at August 17, 2007 3:13 AM

Interesting how a post that primarily dealt with an allusion to a book brought on by a financial issue developed into a series of comments about the best way to navel-gaze. Sheesh!

Posted by Red Island Rhodes at August 20, 2007 7:08 AM

I love the way Taleb writes (having read Fooled by Randomness) and he surely conveys sense. But the point is are we learning the right lessons from such ‘black-swan’ events? Mr Taleb argues convincingly that the spectacular collapse in 1998 of Long-Term Capital Management was caused by the inability of the hedge fund's managers to see a world that lay outside their flawed models. And yet those models are still widely used today! This is ridiculous but not surprising!

Posted by K.Sriram at August 22, 2007 3:42 AM