How Does One Beware of a Black Swan?
Mark Thoma sends us to Chevelle, who is not sure what "beware of the black swan!" means:
Models & Agents: The barking swan: I recently attended an investor conference where, as is typical these days, people gathered to reaffirm how clueless we are about the future of our economy. Just to bang the point home, the keynote speaker was Nassim Taleb, author of “The Black Swan”; a “treatise” on how our failure to take into account eventualities that are possible only remotely, yet are highly consequential, can really hurt us.... Taleb seemed to draw tremendous pleasure from being invited to wine, dine and, for a nice sum, give a speech to those very “imbeciles” who got it wrong because “they didn’t want to hear” (him)....
[T]he suggestion that the present financial crisis is a validation of Taleb’s vilifying statements about economists, statisticians, finance professionals and their entire canon. Oh yes, and the French! Well it’s not. First, because the current crisis is not a black swan. Alas, the world’s economic history has offered a slew of (very consequential) credit and banking crises (see here for a free sample from the IMF). So not only aren’t credit crises highly remote; they can be a no-brainer, particularly if they involve extending huge loans to people with no income, no jobs and no assets.... [T]here were a few other blatant failures that contributed to the current crisis... the avid search for yield as global liquidity ballooned....
“Beware of the Black swan!”, he warns. But what does this mean in practice? For example, I work at one of the top floors of a high-rise building in Manhattan—with a (less than remote) probability that my floor might get hit by a flying suicide bomber dressed as Superman. Pretty consequential, if you care. But what should I do? Change jobs? Move to Peoria? Maybe Taleb can get me a parachute, a golden one please.... Alternatively, I can keep on living as I do, aware that I’m running the risk of becoming a case number in Homeland Security’s terrorist statistics. Taleb’s recommendations on asset allocation are as impractical—barring generalities (like diversification or more equity than debt) that are indisputable for being self-evident. But what about the specifics?...
Ultimately, no matter how imperfect our models are, the problem lies in our failure to use our brain. Only “using our brain” does not mean buying Treasuries. It means identifying investments that are productive and viable, improve our quality of life and create jobs...
