Black_swan
In what is admittedly light reading after yesterday’s trouncing of the equity markets – but loyal readers have read our “Don’t panic” post, right? – there’s bound to be intense debate around this proposition by scientists: it IS, apparently, possible to achieve speeds in excess of the speed of light in a vacuum (at least for neutrinos, that is). It was considered impossible until now (you know, E=mc2) and, if confirmed, it may change quite a few theories. Talk about a ‘black swan’ of enormous proportions. It’s one of those occasions where we’re supposed to remind you to seek the source material, remain skeptical and filter the signal from the noise. However, the ‘multidisciplinary geek’ in us wants to see some scientific foundations shaken up.
We’ve been arguing that “to finish first, first you must finish” for over twenty years. We’ve also recently argued for cash as a strategic weapon with both defensive and offensive features: it is as much “cushion” as it is “cannon”. Nicholas Nassim Taleb has given a lecture recently and the main takeaway is this: “(…) you live long by not dying, you win in chess by not losing—by letting the other person lose. So negative investment is not a sissy strategy. It is an active one.” He also highlighted the planning fallacy, something David Brooks wrote about even more recently, so we’re taking the opportunity to post both together.
Nassim Taleb (with Mark Blyth) has written a very interesting piece for Foreign Affairs called “The Black Swan of Cairo: How Suppressing Volatility Makes the World Less Predictable and More Dangerous” (PDF link here). The strangely radical notion that “to make systems robust, all risks must be visible and out in the open” is almost counter-intuitive and seemingly impractical for today’s leaders, again raising the issue of governance. The “seduction of stability” is real, permeates all aspects of our lives and has to be one of the mental/ behavioral “traps” one has to keep in mind.
Two notes: a strong-worded LEX column about the need for Brazil to “grow up” and face its longer-term, big-picture issues such as lax government spending and poor labor and tax regulations. The other is an Economist article about investors’ growing interest in hedging “tail risk” – Nassim Taleb must have cringed when he read some parts.
“There’s no life without phosphorus because we’ve never seen an organism that doesn’t depend on phosphorus – OOPS, here’s one!” – Just like that the “black swan” is found and the elements that defined life until now have to be rewritten. It also reminded us of an old saying that goes something like this: “The most important expression in science and human discovery is not ‘Eureka!’, it’s ‘hmm, that’s weird…’ “
…says Nassim Nicholas Taleb in the video interview embedded in this post. And while 2007 saw extreme leverage and complexity in banks/ financial system in general, the concept can (and should be) extended to personal debt, government debt and so on – because complexity hasn’t diminished one iota since then. In fact, if pushed to point a direction for complexity in general across the world, we would be quick to point upwards.
Relatively clueless weekend articles by the Wall Street Journal. This one, ‘Preparing for the next Black Swan’, is downright scary in the number of supposedly “heads I win, tail you lose” hedging/ ‘black swan-proof’ strategies currently pushed to customers – increasingly retail customers on top of the institutional ones. To be clear: we’re all for capital preservation, and our company’s success is built more on the back of risk aversion than of risk-taking. However, the article doesn’t do nearly enough to highlight that hedging instruments or strategies, especially untested ones, have not only flaws (have we already forgotten counter-party risk in 2008?) but most importantly costs, sometimes hidden, and in no way are these costs of a fixed nature. This has all the tell-tale signs of a fad…
