White swan. This is completely predictable, as Taleb shows.

"Buy less, buy local" takes on wings......

I so agree with 95% of this op-ed. I have discussed Taleb, and LTCM, etc., on these pages with my MV brethen - admittedly, in a more disjoint fashion, and without so distinguished a credential.

I disagree when it comes to the last 4 lines. I don't agree the war, per se, was "unprovoked"; I know the $3 trillion figure to be a partisan fiction; and I would prefer that politics not intrude on this site so I don't feel the need to rant back. That said - and I submit this is relevant to our Minyan - the "off-budget" nature of the appropriations for the occupation is regrettable. It seems our government is in need of some oversight, ever bit as much as the mega-banks currently in the news.

I read his book Fooled by Randomness and it changed my life to some degree. As a result, I remain more cautious about my investments and despite beating the market for 5 years, I never tell myself that I have a foolproof way to continue to do so. There is luck involved and that luck can be compounded by circumstances beyond my control.

Regardless of the politics, I think three trillion dollars seems like a reasonable estimate of what the war cost. If it's fiction, what's the real number? It has to be in the trillions just based on how much it costs to transport so much stuff, fuel planes, tanks, feed soldiers, medical costs, etc... This has been going on for years too.

Amazing, write a book with a fancy title, make millions off the herd's dribble, and voila, your a new sort of "expert", and the special cause/common cause model of process interaction is bunk! I suppose the "The Black Swan" is now used to teach statistics and economics at Wharton. Taleb is wrong out of the gate with his #1 definition of an outlier as "lying outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility." Bull hocky. Bo knows an outlier when I see one. Under the special cause/common cause process model for a process in a state of statistical control, an outlier gets flagged early on in the process because it fails the application of a set of zone control rules; it is assigned as special cause needing thorough investigation and a REACTION. The 40% returns from the LTCM was, in itself, an outlier that would have failed a control chart measuring various investment techniques ROI's at that time. Furthermore, Taleb's stated, and you repeated, “A vicious black swan has an additional elusive property: Its very unexpectedness helps create the conditions for it to occur." It's very unexpectedness IS the call for investigation...and REACTION. This economic chaos goes all the way back to 1998, leaving plenty of time for correction. Taleb is a Black Swan, GM's bankruptcy [may be] a Black Swan, Fannie/Freddie's failure is a Black Swan, the Chinese amassing such a state-of-the-art manufacturing base is a Black Swan. I say bull hocky again. I guess you may call it what you want, but don't defame process statistics. Defame the people who failed to react to the initial points of the out of control process. Taleb's a wimp. Steven Levitt is the economic LAUREATE with his 2005 version of latter-day economic causal considerations, from his best-selling, non-fiction book "FREAKONOMICS". Right on the mark, in 2005 nonetheless; 3 years ago. Black Swan?? For nearly a decade the signs of pending economic chaos have been written on the stall wall like a hooker's name/number written in shi+. Didn't smell or look good way back then, doesn't smell or look good now either.

The actual "Black Swan" in the current credit situation is a two-parter. First, nobody anticipated that the opaqueness of the (sometimes multi-layer) financial derivatives would cause trading in them to cease. Second, the absolute freeze-up in short-term credit that has, several times this year, threatened - as a result - was unanticipated.

Granted on the two Black Swans as defined, David. But two of them? (I was under the impression that a Black Swan is supposed to be so rare as to be one-off. I have even seen one myself.)
John Maudin had a great wrtie up today on these derivatives. Seems to me that a sensitivity analysis or litmus test could have subjected the CEO's to a little restraint. Capital at high risk as a 35X multiple! Say my family had a net worth of $400,000, that would be tantamount to me taking on a high risk personal debt of $10,500,000. I don't think so, not in this life. Most rational Americans would certainly view this on-going investment strategy as most certainly leading to a Black Friday, or a Black Tuesday, not a Black Swan. This is no "beyond" the 99.99966 percentile outlier by any means. It is an out of control process running rampant with special causes, with no concern for a drift in the mean of 1.5 std. dev., tweaked by sticky fingers on the dial - desiring an alternative output - which process, when left unchecked, always leads to even greater long term deviation.

Don't know anything about process control. I agree that the feedback system is very laggy.

This cannot possibly be a Black Swan event. Why? Because so many people have discussed its possibility. Black Swans were a surprise because NOBODY believed they were possible.

This is a major difference because in discussing the possibility of this current situation, several methods of dealing with it have been developed. Whether any are successful is really the Black Swan.

I'm firmly opposed to the current action, but I see why the gov't did what it did. Fear is, usually, the emotion that drives people to extreme behaviors. It should never be that way, it just is.

What strikes me is this - when the risk of lending causes a lender to not lend, but not lending increases the risk of total failure to 100% - what is the correct course of action? Apparently, for banks, it's deciding that Mutual Assured Destruction is preferable.

We've witnessed a massive game of Prisoner's Dilemma and both prisoners ratted on the other, and now it's unlikely anybody wins.


The main question I have is this - you cannot legislate away moral hazard. Speculation is, by its very nature, moral hazard of a sort. Yet speculation brings stability to markets and pricing. That is, until that speculation is excessive and psychotic in nature. Then you are faced with potential price deflation.

I'm not yet convinced we're there yet. I know many people do believe we are and that the natural outcome of all these events can only be deflation. But that negates several scenarios.

Example - a foreclosure in my condo has allowed us to purchase the unit for substantially reduced value. The owner has not cared for this unit for some time, and we will have to put some work into it. But once we purchase it, and rent it, it will be positive cash flow and our return will be substantial in a very short period.

In other words, crisis is opportunity. It's not just my condo. It's me, too. My wife and I are seeking opportunities to purchase because there will be many. We are also putting off the much needed purchase of a new car realizing we're likely to get a better deal(or at least no worse) in about 3-6 months...allowing us to further improve our financial position in the meantime.

This will be a negative situation only if people with the means allow it to be by not seeking opportunity where it exists.

But a Black Swan? No, I don't think so. I remember discussing in another thread that everything is predictable, even Black Swans. It is defined here as an outlier that situations imply are so unlikely as to be unpredictable. That's absurd. Even as I thought the events of last week were unlikely I would never have said they were unpredictable and I have always believed them a possibility.

Why would any of this surprise anyone? If we're not surprised, then we are prepared. If we are prepared, we can deal with it and thrive.
Then again, I was a Boy Scout.

"This will be a negative situation only if people with the means allow it to be by not seeking opportunity where it exists."

This is more akin to institution insanity by Einsteins definition
Do the same thing over and over hoping for a different result each time with the same inputs

It strikes me that the main attraction of Taleb's "Black Swan" is that it provides and explanation and excuse for what has happened. It relieves all of us of any responsibility. (As in - no could have predicted the unpredictable).

These comments have been enlightening as it reminded me that this was not only predictable, it WAS predicted in the press and on this site years ago.

Not only that but the basic structure and process that led to this "event" is well known. Everyone knew that leverage was very high. Everyone knew that virtually every time in history that leverage gets as high as it did, things have ended badly. The fact that highly leveraged situations almost always have ended badly (when that leverage is carried over several year period - I'm not talking about high leverage for a one time deal - although we know that is risky as well), made this present situation entirely predictable, rather than entirely unpredictable.

It's like saying Hurricane Ike was a Black Swan. Unusual? Yes. Unpredictable???? You tell me.

The process of overleveraging and eventual collapse is very, very well documented. And yet enough people convinced themselves

...that "this time it's different". Gosh, I've NEVER heard that before:).

a vagrant. Yes, this long surmised contageon has been in view for quite some time. Without regard for cause or purpose The Black Swan circles and when exponential skies darken the arrival so abrupt, leaves only time for reaction...or not.

People like to think that they are rational creatures. They like to think that they are honest. They like to think that they are more interested in virtue than in power.

Therefore, in order to get what they want, people lie to themselves. The first lie is always to themselves, and is "I am not lying".

As Shakespeare's Puck put it, "What fools these mortals be!"

This is simply the human condition.

When Diogenes went looking, carrying a lit lamp in the daytime through Athens' public spaces, for an "honest man", "honest man" is actually a mistranslation. Diogenes actually claimed to be looking for "a human being". He didn't find one. After all, humans are "rational", right?

So, human madness caused this situation and human madness shapes the government response. Or, if one wants to be more kind, substitute "foolishness" for "madness".

Examine history in some detail and you will see that this is as it has always been. As Ortega y Gassett put it, "If anything can be learned from history it is that people do not learn from it."

The Depression was really only a true depression for 4 years or so. After 1935 the business climate improved remarkably, aside from a significant relapse in '37. By late '39 the military buildup (combined with latent capacity) in anticipation of inevitable entry into the war had the economy going like gangbusters(This is one reason there are still so many classic cars available from those years). Probably the biggest threat to meaningful recovery is energy and commodity prices. The 30s were a time of relative abundance and relatively low human population,globally. Ie there was a lot more low-hanging fruit. The Depression drove gas oil prices down to a level where it was practically free (around $2 in today's money). We are now clearly entering an era of permanent scarcity. most major commodities have gone "elastic" in response to any demand increase and even the threat of demand seems to have a floor under them. In the past cheap commodities served as an enormous built-in stimulus to recovery. One also sees depletion in other found resources such as the fisheries and certain kind of timber. Diminishing marginal returns have manifested in crop yields, possibly heralding the end of the Green Revolution. Can we overcome this with a value-added economy and/or newer cheaper forms of energy with high ROI's?? It is a lot to go up against IMO.