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Black Swans And The Financial Crisis
Posted by marktmarket • 1/14/09 • Subscribe to this Discussion [RSS] • Report This Topic
Topics: black swan, business, empiricism, financial crisis, financial markets, skepticism
Nassim Taleb is the author of "The Black Swan" and "Fooled By Randomness" and is a Skeptical Empiricist. I was surprised to not find anything about "Black Swans" on BC so I'm starting a thread about it.
A Black Swan is a term coined by Taleb to describe events that are possible, but could not have been predicted by past evidence. The history behind the term is that prior to the discovery of Australia, everyone thought all swans were white, until the first black swan was found. Taleb has used the term to highlight the inherent hindsight bias in people, and especially the scientific and academic circles who tend to be naive empiricists relying too much on existing evidence to project all future observations.
The term Black Swan has found application in financial markets, especially in light of the present crisis, which no economist anticipated until it happened.
I recently featured Taleb speaking out in frustration against the economic and banking establishment, also joined by his mentor: Benoit Mandelbrot, who pioneered fractal geometry and contributed to Chaos Theory. They blame the present belief in naive risk models for failing to anticipate the coming crisis:
thecriticalthinker.wordpress.com/2009/01/14/nassim-taleb/
thecriticalthinker.wordpress.com/2009/01/14/mandelbrot-and-taleb/
Their statements about rapid crashes have striking correspondence with Jared Diamond's observations about societal collapse:
thecriticalthinker.wordpress.com/2009/01/02/analyzing-the-collapse-of-human...
I've also featured Taleb's avant-garde ideas on history and cognitive biases before to provide more background on his philosophies:
thecriticalthinker.wordpress.com/2009/01/08/terrorism-and-platonicity/
Anyone out there who wants to share their thoughts on this and other ideas on the ongoing financial crisis is welcome.
User Comments
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It don't think its correct to say that no economists forecast the economic crisis but since economics is led more by ideology than science I guess people hear what they want to hear. A few years ago when I could see the imbalances in our economy and how we were heading for crisis (with or without the catalyst in the American subprime and its effects) I took measures here to ensure that our family would be as safe as possible including cutting uneccesary expenditure and overpaying on the mortgage. I warned relatives too but they chose to believe other sources.
Point is there has been those who "predicted" the crisis but since many of these would be on the left (economics again led by ideology) we see bankers and other financiers grumble as they lose their jobs because no one "warned them". Perhaps the problem is that all of us in our political reading gravitate to those authors which reinforce our worldview.
So thats my point really, a few years ago I was reading bits and pieces suggesting that the current situation was unteneble and that were heading for a crash- I chose to act on this not because I knew even instinctively this was right but just to be on the safe side. I also made sure that our household didn't follow the rush to connect gas for heating and cooking and we still use solid fuel on the grounds that in economic crisis we could still gather firewood, though this is handy now Russia and Ukraine are in dispute (something else I did not predict).
Have a good day.-
Hey don't beat yourself up: Solzhentsyn was wrong about Russia and the Ukraine too--and he's a Nobel prize winner.
I agree with your sentiments about ideology and political reading taking the influence in decision making. This is why I resonate with Taleb's call to recheck premises and always be in doubt of the "dogma" of the financial establishment--which is what critical thinking is all about.
The other side of the coin is also not to be too attached to evidence, to the point of excluding other possibilities not adequately represented by history.
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I have previously seen Taleb's interview, which I thought was quite good.
As to this financial crisis, it is the last death throes of the present debt based money system, which will end in a crack up boom.
Long, but a must see: The Money Masters.
video.google.com/videoplay?docid=-515319560256183936-
There's a lot of clamour against the Federal Reserve and the concept of fractional reserve banking--however I have to wonder if alternatives to the present monetary system exist, apart from the usual clamour for a return to the a gold standard or similar standard.
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Is there an example in history were a fiat money system has not ended in a total devaluation of the currency. The US dollar has lost 95% of its purchasing power since the inception of the FED - ie 1913.
A gold standard is not necessarily the answer as its stock may be too limited and I believe most of it is in the hands of the same bankers who run the present debt based money system.
The money masters video shows there have been other alternatives to gold and fiat money standards. -
I read about Taleb and the Black Swan analogy some time ago and found it entertaining and amusing that he is so much in demand now after being ignored at first.
Simplisticly I think this is a crisis that had to happen eventually, it's almost like nature trying to put a halt to greed and overexpansion, like wars and disasters seem to happen to curb population explosions. We have a small planet and we have been outgrowing it in every way. Who knows where it will end or how or if we will ever get a grip.-
In a debt based money system, inflation increases mecanically... at a geometric rate (all things being equal). All money is debt, and the debt must ever increase.There is no reverse gear.
Without a positive current account balance and/or savings, the tower of debt starts falling apart once the total interest due rises above incremental debt. Unfortunately, the collapse doesn't pan out as smoothly as in a controled demolition. -
^ To your last question, take your pick of the hundreds of economists and environmentalists ready to give you an accurate forecast, whether its the (short) length of the recession, or how high the water level will be in 50 years...
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Along with Money Masters, this animated film "Money As Debt" is a good way to appreciate the nature of the current fiat monetary system:
thepharmacy.wordpress.com/image-therapy/money-as-debt-paul-grignon/
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Yes, agreed, MTM.
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thecriticalthinker.wordpress.com/2009/02/01/peter-schiff-criticized/
Peter Schiff fans, and everyone who's a critic of government bailout will find it interesting to know that Mike Shedlock has put out a scathing critique of Schiff and his ideas.
Although the criticism seems to be a self-advertisement, the whole Schiff vs. Shedlock affair seems to be more manifestations of the fallacy of history that Taleb mentioned in his interviews.
Similar note: Peter Schiff and Steven Leeb have been at each other since the bailout discussions (bank, auto, stimulus) began last year. Very animated and entertaining to watch:
thecriticalthinker.wordpress.com/2009/01/25/bailout/ -
thecriticalthinker.wordpress.com/2009/02/27/banks-moral-hazards/
Taleb at Davos with his insights. Also watch with frustration at CNBC anchors trying to coax insights out of Taleb and Roubini:
thecriticalthinker.wordpress.com/2009/02/27/dr-doom-black-swan/ -
I agree with Peter Schiff, although he may also be there for the show.
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A sidenote: there are just too many "experts" on television sometimes--although some make more sense than others.
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