Black Swan 101

[Triple Zero]

exactly, what Verb said.

the point is, that if it was really mediocristan, and probabilities were distributed like a gaussian, the chance of a black swan type event occurring in a gaussian distribution would be to happen every once in a few thousand lifetimes of the universe.

clearly this is not the case, as black swans happen a lot more often then that.

the conclusion is that the actual probability distribution must be different from a gaussian. btw that's why i disagree with the second image in Verb's post, because these kind of probability distributions do not look anything like a "bell" curve, but a lot more like a one-sided exponential downward slope.
(with a few boundary effects near the low end of the slope btw, income distribution on the low end trails off a bit faster, because the difference between "no food" and "not enough food to survive" are both fatal, causing a slight distortion from the "perfect" exponential curve)

and indeed PBF, "out of context" problems are exactly the kind of things that "turn" perceived mediocristan situations into extremistan ones. but that's a fallacy, saying "yeah this event behaves gaussian, as long as we ignore the really big outliers" basically means the event is not gaussian at all, and you're going to do a real shitty job at predicting the events sooner or later. sometimes with catastrophal results.
one of the things Taleb explains in his books is why this distinction really matters.

[Cainad (dec.)]

the conclusion is that the actual probability distribution must be different from a gaussian. btw that's why i disagree with the second image in Verb's post, because these kind of probability distributions do not look anything like a "bell" curve, but a lot more like a one-sided exponential downward slope.
(with a few boundary effects near the low end of the slope btw, income distribution on the low end trails off a bit faster, because the difference between "no food" and "not enough food to survive" are both fatal, causing a slight distortion from the "perfect" exponential curve)

My image, my post, thank yuo very much

But seriously, I agree that the second image is not accurate. I suppose that's kind of the point; Extremistan causes bell curve distribution of probability to become a pile of worthless fail. If someone could design a more accurate image, I think it would be beneficial.


As a side note, I think the use of the terms Mediocristan and Extremistan is pretty much begging for menu-eating. It creates the impression that there are places where everything really is mediocre or extreme.

[Triple Zero]

(oh that was you, heh sorry)

and yeah, an important thing is to realize that mediocristan and extremistan are very much intermingled.

also, pics of exponential distributions, pick one:
http://images.search.yahoo.com/search/images?p=exponential+distribution
(they're not all alike, like the gaussians, because they come in a wide range of forms--although some of the results of that search are not quite exponential distributions)

[P3nT4gR4m]

So the general rule is - nobody sees a black swan coming.

I guess the cool kids are the ones who see it first and realise what it is?

[Cain]

Well, you can't really see it coming, for the aforementioned reasons, but you can structure what you are doing (whatever that is) if you know one is possible, so that it doesn't wipe you out, and maybe even benefits you.  Being aware it can happen is the best defence, really.

[P3nT4gR4m]

I was thinking more along the lines of looking at an emerging phenomena, realising it's a black swan, as early as possible and second guessing the consequences for maximum gain.

eg. I wake up tomorrow and there's a bunch of undead shambling round the streets - my first thought would be grab an island and secure a supply line, escape route and perimeter thereof. I guess most people would be freaking out and doing the "how can this be happening" - spiel

[Verbal Mike]

And most governments would be denying it until the president has actually been eaten alive.

[Bebek Sincap Ratatosk]

I was thinking more along the lines of looking at an emerging phenomena, realising it's a black swan, as early as possible and second guessing the consequences for maximum gain.

eg. I wake up tomorrow and there's a bunch of undead shambling round the streets - my first thought would be grab an island and secure a supply line, escape route and perimeter thereof. I guess most people would be freaking out and doing the "how can this be happening" - spiel

But, Silly, in that case, the Black Swan would be that the Zombie Virus was a virulent airborne strain...

[P3nT4gR4m]

Hmmmm .... Tricky fuckers these swans. Never trusted them. There's a rumour going around they can break a mans arm with their wings. This has, of course, never happened in recorded history. I think the swans may have started the rumour 

[Cain]

They also frequently get eaten by the foreign enemy de jour as they THREATEN TO TAKE OVER OUR COUNTRY (also no citation on that).

[LMNO]

Perhaps this is a good example of a Black Swan:

Moodys is a renowned investment firm that uses complex formula to rate investments.  A few years ago, they gave top rating to a some products.  On their advice, many, many people bought in, for billions.

This product was tied to the sub-prime market, and crashed.  Of course.

Upon review, the AAA rating given was because of a computer glitch. http://www.forbes.com/afxnewslimited/feeds/afx/2008/05/21/afx5032513.html


The glitch would be considered a black swan because:

1.  It occured outside the "rules" of investment strategy.
2.  No one expected it until it happened.
3.  It had a major impact.

[P3nT4gR4m]

No offence but I think everyone will agree - zombies are a much more inspiring example

[Bebek Sincap Ratatosk]

No offence but I think everyone will agree - zombies are a much more inspiring example

Woah, I so totally agree,,,
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[hooplala]

ME TOO!! ..... OoooOOOooh - what's this??  Scarlett Johansen's new album!  THERE'S a Black Swan for you!
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[P3nT4gR4m]

Bub = Best zombie evar!