"Black Swans" Is the Wrong Way to Think About It: "Great Birnam Wood to High Dunsinane Hill Come" Weblogging...
Well, this is certainly surprising; this is certainly a black swan!:
And it collides on my desk with (a) Shakespeare's Macbeth, and (b) my own grappling with how I have been very surprised by what did and did not happen to our policies and our economies since 2005...
So let's raise the curtain:
...First Witch: Thrice the brinded cat hath mew'd.
Second Witch: Thrice and once the hedge-pig whined.
Third Witch: Harpier cries ''Tis time, 'tis time.'
First Witch: Round about the cauldron go;
In the poison'd entrails throw.
Toad, that under cold stone
Days and nights has thirty-one
Swelter'd venom sleeping got,
Boil thou first i' the charmed pot....
Third Apparition: Be lion-mettled, proud; and take no care
Who chafes, who frets, or where conspirers are:
Macbeth shall never vanquish'd be until
Great Birnam Wood to high Dunsinane Hill
Shall come against him.
Macbeth: That will never be.
Who can impress the forest, bid the tree
Unfix his earth-bound root? Sweet bodements! good!
Rebellious dead, rise never till the Wood
Of Birnam rise, and our high-placed Macbeth
Shall live the lease of nature, pay his breath
To time and mortal custom...
I have, in my minds eye, a scene--it probably never happened this way:
The young quant whippersnappers present a position to the senior partners. And then, when they have finished, one of them says:
Well, you have just convinced me that 'Macbeth shall never vanquish'd be until Great Birnam Wood to high Dunsinane Hill shall come...'
Now tell me: in what scenarios would Great Birnam Wood come to High Dunsinane? And what would be the value of our positions in those scenarios?
And they look at each other, catch one another's eyes, and think: We're doing stochastic calculus. He's quoting Shakespeare? This is totes weird...
Yet, in my career, Great Birnam Wood has come to High Dunsinane Hill six times I can recall off-the-cuff:
- Mexican peso: rich Mexican demand for New York bank accounts greater than U.S. firm demand for assets in Mexico secure against tariffs and quotas...
- Mexican political economy: allowing imports of Iowa corn, bad as it was for rural farmers, was ...
- Bush v. Gore...
- The 2007-8 destabilization of Wall Street by what ought to have been an easily-handled amount of bad subprime mortgages...
- The failure in 2008-9 to follow the Bagehot rule--to lend freely on collateral that was good in normal times, but at a penalty rate...
- The failure of North Atlantic central banks to stabilize nominal GDP after 2009...
In all six I was betrayed by my knowledge--the thin-tails disease. I thought I understood a situation that I knew a lot about. I did not reflect that, as Robert Solow semi-quotes Damon Runyon: "Between human beings nothing is more than three-to-one."
I have concluded that to say that these are "black swans" is to fundamentally mistake the problem--they happen far too often.
It is, rather, Denning-Kruger--the belief that since you know about this, you got this, and other people will also know what you know and behave as you think you would behave.
Or, as Robert Solow semi-quotes Damon Runyon: "Between human beings nothing is more than three-to-one"...