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Thursday, December 05, 2013
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Taleb: Black Swans can dominate business
A Black Swan moment is an event—positive or negative—that is deemed improbable yet causes massive consequences. Black Swan logic makes what you don’t know far more relevant than what you do know. Visiting Lebanese-born but New York-based Black Swan author Nassim Taleb delivered a feature address on the topic at Queen’s Hall, Port-of-Spain last week Saturday. He was hosted by the Trinidad and Tobago Coalition of Services Industries (TTCSI). Guardian Media Ltd was the platinum partner. Before Taleb spoke, guests were addressed by CEO TTCSI Nirad Tewarie, President TTCSI Rabindra Jaggernauth and Minister of Planning and the Economy Dr Bhoe Tewarie.
Before moving into places like “Mediocristan” and “Extremistan”, Taleb explained a Black Swan was a rare sight in places like the Mediterranean where only flocks of white swans soared on the horizon. He created the imaginary Extremistan to explain how an increasingly man-made planet could evolve away from mild into wild randomness. Mediocristan is another creation that makes the person feel the Black Swan moment is of small consequence or does not exist. He applied the Black Swan theory to business and concepts like “boom and bust” and “fragility and robustness.” Taleb said: “We must never be a turkey. It’s never a good day to be a turkey. Black Swans can dominate business or economics. You can’t predict what’s the next Black Swan. It can be fragile or robust. Never rule out big events.”
Taleb cited China as an example of a robust economy. Obviously, Greece was fragile and Haiti had an economy torn apart. Making reference to Greek allusions, he said the proverbial Sword of Damocles lent to fragility and meant it was “not a very comfortable situation”. “Robust” was interpreted by the Phoenix which could rise again. In mythology, the bird rose out of the ashes. Still making reference to Greek literature, Taleb said: “Anti-fragile referred to the hydra (a serpent whose head reappeared every time Hercules tried to cut it off). He said: “You need a moderate amount of stress. The crisis is stressing the economy. There are crises in banking.”
Zeroing on T&T, he said: “It had the advantage of being small. The challenge was how to build something that was not fragile. Make sure you don’t have debt. Trade on leverage.” He embellished his lecture with slides showing books, Internet, Early Man, the Irish potato crisis and barbell. Taleb described the barbell strategy as “knowing you are vulnerable to prediction errors, and if you accept that most ‘risk measures’ are flawed. Because of the Black Swan, then your strategy, is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative.”
About Black Swan
An excerpt said: “Taleb offers tools to navigate and exploit a Black Swan world. Chapter 14 explores From Mediocristan to Extremistan. He noted the world is unfair. “Every morning the world appears to me more random than it did the day before, and humans seem to be even more fooled by it than they were the previous day. It is becoming unbearable. I find the world revolting.” Taleb concluded They Want to live in Mediocristan. “You can see it is extremely convenient to assume we live in Mediocristan. Because it allows you to rule out those Black Swan surprises! The Black Swan problem either does not exist or is of small consequence if you live in Mediocristan.
“We do not live in Mediocristan. The Black Swan needs a different mentality. As we cannot push the problem under the rug, we will have to dig deeper into it. This is not a terminal difficulty—and we can even benefit from it.” Another segment Nobody is Safe in Extremistan said: “The winner stays a winner. Now, a loser might always remain a loser, but a winner could be unseated by someone new popping out of nowhere. Nobody is safe.” It ended on a sobering note: “Extremistan is here to stay, so we have to live with it, and find the tricks that make it more palatable.”
Themes related to Black Swan
A Black Swan moment has an outlier—it lies outside the realm of regular expectations because nothing in the past can convincingly point to its possibility. It carries an extreme impact and in spite of its outlier status, human nature makes us concoct explanations of its occurence after the fact, making it explainable and predictable. An example would be the terrorist attack on September 11, 2011 in New York.
Taleb noted: “Had the risk been reasonably conceivable on September 10, it would not have happened. If such a possibility were deemed worthy of attention, fighter planes would have circled the air above the twin towers, airplanes would have had locked bulletproof doors, and the attack would have not taken place.”
• Focus on preselected segments of the seen and generalise from it to the unseen
• Stories that cater to our Platonic thirst for distinctive patterns: the narrative fallacy
• Behave as if the Black Swan does not exist: human nature is not programmed for Black Swans
• History hides Black Swans from us and gives us a mistaken idea about the odds of these events
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