Pretend You Don't See the Black Swans
Hoisted from Comments: Slocum writes;
Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: "I had assumed that no-one was stupid enough to fall for this trick; one reason why I was underwhelmed by Taleb's The Black Swan - which laboured similar points - was that I thought he was just stating the bleedin' obvious. But perhaps I was wrong."
But the problem, of course, is that investment strategies that fail to take in account unlikely (but far from impossible) events will do better, most of the time, than those that conservatively factors in unlikely events.
Your strategy may have, say a 25% chance of going bust in the next decade, but that's OK for a fund manager -- because a 75% chance of being lucky enough to run the table and pocket enormous sums of cash and be considered a prince of Wall St is a good bet. And then even when the black swan event does happen, you've probably already pocketed a lot of cash AND you really won't be blamed anyway, since plenty of others will be in similar straits and many of your customers will accept the explanation that your strategy was perfectly sound but that nobody could have been expected to predict the financial equivalent of being struck on the head by an asteroid. Which is what Viniar is claiming -- and I don't think it's stupidity, it's spin. Although it's possible that he believes his explanation--sometimes you can deceive others more effectively if you're deceived yourself.
The incentives just aren't there for planning for black swans. The highest rewards and the greatest glory go to those managers who bring in the highest returns during 'normal' times at the expense of leaving their funds exposed to black swans.
As somebody-or-other once said, it's very hard for a fund to gain clients by exhibiting good performance in bad times. In bad times clients are bailing out of Wall Street, not putting money in or shifting money from one fund to another.
